PAM200_Section9

PAM200_Section9 - PAM200 Section 9 David De Angelis...

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PAM200 – Section 9 David De Angelis – [email protected] Problem 10.17. When televisions can be freely imported at a price of P W = $160, domestic producers will produce 20(160) = 3200 television sets. Domestic demand is 40,000 – 180*160 = 11,200 units. 3200 3600 7600 11,200 40,000 Q P 230 222 200 180 160 Domestic Supply A B J C F G K E P W + $20 P W Demand When the import duty of $20 is introduced, the effective price of importing televisions is $180. At this price, domestic firms will supply 20(180) = 3600 televisions, and demand will be 40,000 – 180(180) = 7600. Domestic producer surplus will increase by area C = (180 – 160)(3200) + 0.5(180 – 160)(3600 – 3200) = 68,000. The tariff creates a deadweight equal to area F + K = 0.5(180 – 160)(3600 – 3200) + 0.5(180 – 160)(11,200 – 7600) = 40,000. An import duty of $70 raises the effective import price to $230. You can see from the graph that this is above the equilibrium price of $200 that would prevail in the domestic market without any foreign trade. Thus, imposing such a high import duty is equivalent to banning trade in this industry altogether. The new price will be $200 and the quantity demanded 4000.
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