Question

If the US demand for a border wall (in miles of wall built) is given by: Q = 5000 - 100 P. Where P is the price of each mile. The supply of border wall is given by: Q = 150P.

a) What is the equilibrium quantity in the market?

b) Suppose there is a Mexican company who can build the wall for half the price. How many miles of border wall will be built by this Mexican company?

c)If the US White House demand a $5 tariff for each mile of wall built by the Mexican company, how much will be collected in tariff revenue?

Answer 1

a) Equilibrium quantity is determined where demand = supply. So,
5000 - 100P = 150P
So, 5000 = 100P + 150P = 250P
So, P = 5000/250 = 20
And Q = 150P = 150*(20) = 3000
The equilibrium quantity in the market is 3000 miles.

b) Mexican company can build at half the price. So, new price, P' = P/2 = 20/2 = 10
US supply = 150P = 150(10) = 1500
US demand = 5000 - 100 P = 5000 - 100(10) = 5000 - 1000 = 4000
So, Mexican company will build 4000 - 1500 = 2500 miles

c) Price after tariff = P' + 5 = 10 + 5 = 15
Now, US supply = 150P = 150(15) = 2250
US demand = 5000 - 100 P = 5000 - 100(15) = 5000 - 1500 = 3500
So, Mexican company will build 3500 - 2250 = 1250 miles
So, tariff revenue = (Amount of tariff*1250) = (5*1250) = $6250