Question

The market for widgets in Econland is given as follows: Supply: QS = 3P – 600 Demand: QD = 900 – 2P Initially, the world price of widget is $260 per unit. Note: Be sure to show your calculation. In attempt to help domestic firms, the government of Econland wants to lower the level of imports to 135 widgets by imposing a specific import tariff. In addition, studies show that imposition of any trade policy by a large open economy will change the world price of widgets by $2 per unit (i.e., the world price of watch will either increase or decrease by $2 after the imposition of trade policy).

a) (15 points) Answer the following questions if Econland is a small open economy:

• Find the specific tariff that would achieve the goal.

• Find the change in total surplus and decompose the sources of the change in total surplus (i.e., explain and identity the change in total surplus due to the consumption distortion loss and other sources of gains or losses. Be sure to show the numbers).

• Show your answers from the above parts in a well-labelled demand-supply diagram for the market of widget in Econland. Be sure to show the numbers in your diagrams.

b) (15 points) Redo part (b) if Econland is a large open economy.

Answer 1

government of Ecoland wants to restrict the level of imports to 135

in case Ecoland is a large economy

studies show that imposition of any trade policy by a large open economy will decrease the world price of widgets by $2 per unit from $ 260 to $ 258

specific tariff should be of $ 15 in case of large economy