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SOLUTION PS4

SOLUTION PS4 - Eco 100 Spring 2008 PS4 Solutions 9.7 While...

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Eco 100 Spring 2008 PS4 Solutions 9.7 While consumers pay the same world price for domestic and imported clothing, they benefit when trade is allowed and domestic prices are driven to lower world prices, increasing the consumer surplus. 9.9 a) True . For any given world price lower than the domestic price, a more elastic demand means a larger increase in quantity demanded, and therefore a greater gain in consumer surplus. b) False . There would be no gain only if demand is perfectly inelastic. c) False . As long as quantity demanded increases with trade, consumer surplus will rise. 9.10 P1 P2 Change Consumer Surplus A+B A+B+C+D+E+F C+D+E+F Producer Surplus C+G G –C Total Surplus A+B+C+G A+B+C+D+E+F+G D+E+F a) World prices drop from P1 to P2, the Surpluses under each regime and the change in surplus is detailed in the chart. Consumer surplus changes by C+D+E+F, producers’ changes by –C, and total surplus changes by D+E+F

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b) From above, assuming linear functions need to calculate the areas of C, D, E, F Area of C = 200000*\$100 + 1/2*200000*\$100 = \$30 Million Area of D = 1/2*200000*\$100 = \$10 Million Area of E = 600000*\$100 = \$60 Million Area of F = 1/2*200000*\$100 = \$10 Million Change in consumer surplus is \$110 Million . Change in producer surplus is –\$30 Million . Change in total surplus is \$80 Million c) With the tariff, the consumer and producer surplus will revert to pre-trade levels. So change from trade is consumer surplus is –\$110 Million. Change in producer surplus is \$30 Million.
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