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Econ100B PS6 - (c Now suppose that Bhutanese king decides...

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ECO 100B Problem Set 6 Answers will be posted on June 6, 2008 1. Alice and Bob consume milk, M , and cookies, C . Alice°s utility function is U A = M A C A and Bob°s is U B = M 0 : 5 B C 0 : 5 B . Their initial endowments are M A = 10 ; C A = 20 , and M B = 20 , C B = 10 . (a) Draw the Edgeworth Box. (b) What the marginal rates of substitution for each person? (c) What is the contract curve for this exchange economy? (d) What is the core for this exchange economy? 2. Consider the same question as before but now suppose that U A = M A + C A , but U B and endowments are as before. 3. (Trade From Chapter 9) Suppose that Bhutan°s economy faces a domestic supply curve of apples of Q S = 2 P and a demand curve given by Q D = 25 ° P . Moreover, suppose that Bhutan can import apples from the US at a price of $5 per apple. (a) What will be Bhutan°s demand for apples? How much will be provided domestically and how many will be imported? (b) With free trade, what are the consumer and producer surplus?
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Unformatted text preview: (c) Now suppose that Bhutanese king decides to impose a quota that not more than 7 apples can be imported. i. What will be the new equilibrium price? (Realize that the quota means that 7 = Q D & Q S ; use that to solve for P ). ii. What is the consumer surplus with the quota? iii. What is the producer surplus with the quota? iv. What is the deadweight loss from having the quota? (d) Instead of a quota, suppose the Bhutanese king decides to impose a tari/ of $1 on imported apples. i. What will be the new equilibrium price with the tari/? ii. How much will be imported given the tarri/? iii. What are the consumer and producer surplus with the tari/? iv. What is the government revenue with the tari/? v. What is the deadweight loss? 1...
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