1 Economics 101 Summer 2016 Answers to Homework #3 Due June 8, 2016 Directions: The homework will be collected in a box beforethe lecture. Please place your name, TA name and section number on top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Late homework will not be accepted so make plans ahead of time. Please show your work.Good luck! Please realize that you are essentially creating “your brand” when you submit this homework. Do you want your homework to convey that you are competent, careful, professional? Or, do you want to convey the image that you are careless, sloppy, and less than professional. For the rest of your life you will be creating your brand: please think about what you are saying about yourself when you do any work for someone else! 1. Consider a small economy whose market for pencils is described by the following demand and supply equations where P is the price per pencil and Q is the quantity of pencils: Domestic Demand: P = 20 – (1/20)Q Domestic Supply: P = (1/80)Q Suppose this economy opens the pencil market to trade and that the world price is $2 per pencil. a) Given this information and assuming that this domestic economy opens its pencil market to trade, find the value of imports, value of exports, value of consumer surplus with trade (CStrade), value of producers surplus with trade (PStrade), and the value of total surplus with trade (TStrade). Explain how you found your answers. Suppose a tariff of $1.00 per pencil is imposed on this good by the domestic economy’s government. b) Given this tariff, find the values of the following items. Show how you found your answers. Number of imports with tariff = _________________ Number of exports with tariff = ________________ Government tariff revenue = ____________________ CStariff = _____________________ PStariff = ___________________ DWL with tariff = ____________________ c) From the perspective of this domestic economy analyze the impact of this tariff. Who benefits from the tariff and how do they benefit? Who loses from the imposition of the tariff and what is their loss? Answers: a) From problem #2 we know that the price in this economy if the pencil market is closed to trade is $4 per pencil. So, we can conclude that the world price of $2 per pencil is less than the closed market price of $4 per pencil: this implies that this domestic economy will import pencils if the market for pencils is opened to trade. To calculate the level of imports we need to know how many pencils will be domestically demanded at a price of $2 per pencil and how many pencils will be domestically supplied at a price of $2 per pencil. Thus, 2 = 20 - (1/20)Qd or Qd = 360 pencils and 2 = (1/80)Qs or Qs = 160 pencils. The level of imports will be equal to Qd – Qs or 200 pencils. There will be no exports from the domestic producers of this good since the world price is less than the closed price in this domestic economy.

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2 CStrade = (1/2)($20 per pencil - $2 per pencil)(360 pencils) = $3240 PStrade = (1/2)($2 per pencil - $0 per pencil)(160 pencils) = $160 TStrade = $3400 b) Number of imports with tariff = 100 pencils Number of exports with tariff = 0 pencils Government tariff revenue = $100 CStariff = $2890