05 Jun Question TARIFFS AND QUOTAS
Question
TARIFFS AND QUOTAS
Use the following information to answer parts (a) through (d).
Consider the market for lawnmowers in a small country. The domestic demand curve is
P = 100 – (1/10) QD and the domestic supply curve is P = 10 + (1/5)QS.
a. What is the equilibrium market price and quantity, assuming no imports or exports?
b. If the government opens up the economy to outside trade, and the world price is $60, will the country be importing or exporting lawnmowers? How many lawnmowers will it import or export? Draw this on a graph.
c. Suppose the world price of lawnmowers is $60 and the government opens this market to trade while at the same it imposes a $5 tariff on each lawnmower that is imported. Given this tariff, what will the domestic demand be? Given this tariff, what will the domestic supply be? Given this tariff, what is the government revenue from the tariff? Update your graph to show all these quantities. Also mark the regions that correspond to deadweight loss, domestic consumer surplus, and domestic producer surplus when this market is open to trade and the government imposes a $5 tariff per imported unit.
d.Instead of a tariff, the government decides to impose an import quota of 30 lawnmowers. On a new graph, draw the new market supply curve given this import quota.. What’s the new equilibrium price given this import quota? How many
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