Question

The domestic demand for radio is given by Q= 5000 - 100 P. The domestic supply curve for radio is given by Q= 150P. Suppose radios can be imported at a world price of $10 per radio.

1) How many radios will be imported

2) Calculate the total surplus for the open economy

3) Now suppose domestic radio producers succeed in getting a $5 tariff implemented, how many radios would be imported?

4) How much would be collected in tariff revenue?

Answer 1

Domestic demand : Q=5000-100P

Domestic supply: Q=150P

So,in equilibrium QD=QS

5000-100P=150P

or P=20 and Q=3000

1) When the world price is 10

QD=5000-100(10) = 4000 and QS=150X10 = 1500

So,Imports = 4000-1500=2500

2) CS=0.5X4000X(50-10) = 80000

PS=0.5X1500X10 = 7500

TS=80000+7500 = 87500

3 When a tariff of $5 is imposed

then world price would increase to $15

QD=5000-100X15 = 3500

QS=150X15 = 2250

Imports = 3500-2250 = 1250

4) Tariff revenue =imports x tariff = 1250x5 = 6250