08 Jun Question The inverse demand and supply for infant formula in
Question
The inverse demand and supply for infant formula in China are given by:
Inverse demand p = 120 ? 3QD
Inverse supply p = 20 + QS
The free-trade price for pyjamas is pW = 30.
(a) Calculate the quantities of infant formula supplied, demanded and imported in China.
(b) Assume now that China sets a tariff equal to $9 per unit. This tariff leads to the world price of infant formula falling to pW
t = 27. Discuss briefly why the tariff has this effect on the world price of infant formula.
(c) What is the price consumers will pay for formula in China after the tariff is put in place? What is the price Chinese producers will receive for their sales of formula?
(d) Calculate the quantities supplied, demanded and imported in the equilibrium with the tariff. Illustrate.
(e) Illustrate the welfare effects of the tariff in China for its producers and consumers, government and the country as a whole. In your graph, identify the production distortion, consumption distortion and terms of trade gain/loss, if any. Does total welfare go up or down? (Calculation of the total wel-
fare change is required only if you cannot determine otherwise whether it is positive or negative)
(f) Illustrate and identify the welfare effects of the tariff for the Netherlands that is a net exporter of infant formula.
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