ps2-ak-6333-sp18.pdf - ECO 6333 Trade Policy Spring 2018...

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ECO 6333: Trade Policy Thomas Osang Spring 2018 Problem Set 2: Tariffs and Non-Tariff Barriers under Perfect Competition - Answer Key Part I: 6 - J J J J J J J J J J J J J J J J J J J J J b b b b b b b b b b b b b b b b b b b b b b b b J J J J J J J J J J J J J J J J J J b b b b b b b b b b b b b b b b b b b b b b b F C u T u t E Q T C Q t C C T C Q T F Q t F C t F C T F B C C’ B’ p t d ’ line p t d line p T ’ line E’ C t C IC( p T ) path IC( p t d ) path p T line Free trade equilibrium: B: production point C: consumption point BEC: trade triangle u T utility 1
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Post import tariff equilibrium: B’: production point C’: consumption point B’E’D’: trade triangle u t utility Part II: 1. Setting S=D gives P A = 14 and Q A = 17. 2. Given P T = 8, we have D T = 29 and S T = 5, so M T = D T - S T = 24. 3. 45 - 2 P - 2 P + 11 = 10. Hence, P q d = 11 . 5. Also, D q = 45 - 23 = 22. Also, S q = 2 x 11 . 5 - 11 = 12. 4. (a) Consumer surplus without quota: 0 . 5 x 29(22 . 5 - 8) = 210 . 25 Consumer surplus with quota: 0 . 5 x 22(22 . 5 - 11 . 5) = 121 So, import quota reduces consumer surplus. (b) Producer surplus without quota: 0 . 5 x 5 x (8 - 5 . 5) = 6 . 25. Producer surplus with quota: 0 . 5 x 12 x (11 . 5 - 5 . 5) = 36. So, import quota increases producer surplus. (c) Quota rent: 10 x (11 . 5 - 8) = 35 (d) Welfare without a quota = CS + PS = 216.5 Welfare with quota = CS + PS + Quota rent = 192 Change in welfare = 192-216.5 = -24.5 (i.e. a welfare loss due to quota) 2
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Part III: 1. A quota differs from a tariff in that the quantity of imports is fixed and
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