08 Jun Question Econ 440 – Homework 4 Due April 27 by 11:59pm MST
[Out of 15 points total]
1. Agronomia is a SMALL country that takes the world price of corn as given. Its domestic supply and demand for corn is given by the following:
D = 45 – 3P and S = 3P – 9
a. Assume initially that Agronomia does not open to trade. What is the autarky (no trade) equilibrium price and quantity? (1 point).
b. Suppose Agronomia decides to engage in trade. Determine the quantity demanded, quantity supplied, and import given the world price (Pw) of $6 per bushel of corn. (Hints: Plug Pw into original equations). (1 point).
c. If the Agronomia government imposes a tariff in the amount of $1 (i. e. t = $1), what is the new domestic price? What is the amount imported? (Hints: Plug the new domestic price into original equations). (2 points)
d. Graph your results! (Hints: Figure 8-5 page 249). (1 point).
e. Calculate consumer surplus, producer surplus, and government revenue BEFORE and AFTER tariff is applied. (1 point).
f. Calculate the terms-of-trade gain. Explain. (1 point).
g. What is the net effect of the tariff on Agronomia’s welfare? (1 point).
2. Refer to Problem 1 above. Suppose the Agronomian government applies an import quota that limits imports to 12 bushels.
a. Determine the quantity demanded, quantity supplied, and new domestic price with the quota. Remember, for every level of import quota (in perfect competition), there is an equivalent import tariff that would lead to the same Home price and quantity of imports. Here is how to get the new domestic price with quota: subtract supply from demand, then equate with quota limit, which is 12 bushels. (2 points).
b. Calculate the quota rent. (2 points).
c. Assuming that the quota licenses are given to domestic producers, what is the net effect of the quota on Agronomia’s welfare? (2 points).
d. Assuming that the quota rents are earned by foreign exporters, what is the net effect of the quota on Agronomia’s welfare? (1 point).
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