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Economics 102 Fall 2007 Answers to Homework 2 Problem 1: In Schulzland, a small closed economy, the supply and demand for bushels of peanuts are given by D: P = 200 – 5Q and S: P = 40 + 3Q. The world price of peanuts is \$70 per bushel. a) Find the equilibrium price and quantity when the economy is closed. Setting our S & D equations equal to each other, we have: 200 – 5Q = 40 + 3Q, so 160 = 8Q, so Q* = 20, P* = 100 b) Graph the domestic supply and demand curves for peanuts in Schulzland. Calculate the total consumer and producer surplus in the domestic market and label the appropriate areas on the graph. To calculate CS and PS, we simply find the area of the above triangles: CS = (1/2)*100*20 = \$1000 PS = (1/2)*60*20 = \$600 c) Now Schulzland opens to trade. Find the quantity demanded and supplied domestically. What is the total quantity of imports? At WP = 70, we can simply plug this price into our D & S curves to find the quantities supplied and demanded domestically. Thus we have: 70 = 200 – 5Q D , so 130 = 5Q D , so Q D = 26. 70 = 40 + 3Q S , so 30 = 3Q S , so Q S = 10. Therefore, the total volume of imports is 26 – 10 = 16.

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d) Graph the newly opened economy by adding the world price to the domestic supply and demand curves. Calculate the total consumer and producer surplus under free trade and label the appropriate areas on the graph. Again, we need only find the areas of these triangles to find CS and PS. CS = (1/2)*130*26 = \$1690 PS = (1/2)*30*10 = \$150 e) Domestic peanut producers, upset by the new trade policy, lobby President Charles to protect their industry by imposing a tariff of \$15 per imported bushel of peanuts. Find the new quantity of imports. With the tariff, we have WP + T = \$85, and we can plug this value into our S & D eqns.
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