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ec205 study guide Solution-2

# ec205 study guide Solution-2 - Murat Kilinc EC-205...

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Murat Kilinc EC-205 FUNDAMENTALS of ECONOMICS Fall-2005 Problem Set-2-Solutions 1) By using supply and demand curves show how an “oil import fee” would affect a country on a graph. Also write down the consequences of the fee on domestic quantity demanded and domestic quantity supplied? As we can see in the first graph, before the import fee the price of the good is \$18, in both the domestic and foreign market. As the second graph shows an import fee of \$ 6, the price paid by the consumers goes up to \$24 and as a result the imports of crude oil go down from 5.9 million barrels to 3.2 million of barrels of oil. As a result of the import fee, the domestic quantity demanded goes down from an initial 13.6 to a 12.2 milion barrels. On the other hand the quantity supplied goes up from an initial 7.7 million barrels to a final 9 million barrels. Of course you could have made up your own numbers for this question. The important part is to get the directions of the movements right. This requires using the right graph in the first place. 2) a) What is consumer surplus? How can we measure it?(Hint: Can draw a graph) Consumer surplus is the difference between what a consumer would have been willing to pay for each unit of a product and the price they actually paid

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The dark(blue) area in the figure above shows consumer surplus.(Price paid is \$2.50 ).
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