Question

1. Consider a small open economy. Suppose the market for corn in the Banana Republic is competitive. The domestic market demand function for corn is Qd = 10 − 0.5P and the domestic market supply function is Qs = P − 2, both measured in billions of bushels per year. Also, assume the import supply curve is infinitely elastic at a price of $4 per bushel.

(a) Suppose the government imposes a tariff of $2 per bushel. What will the new equilibrium price and quantity be? What is the domestic consumer surplus? domestic producer surplus? government tax revenue? deadweight loss? Show all of these numerically and graphically.

(b) Ignore part (1a).

Suppose the government imposes an import quota such that the domestic equilibrium price is PQ = 6. What is the domestic consumer surplus? domestic producer surplus? Foreign producer surplus? deadweight loss? Show all of these numerically and graphically.

*ONLY ANSWER 1b PLEASE

Answer 1