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ECON_333_Exercise_ANGELKEY-1

# ECON_333_Exercise_ANGELKEY-1 - Imports = 11 =(100-P(50 2P...

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Name:_________________________________  PSU ID:______________________ ECON 333 Suppose that the domestic demand and supply for hats in a small open economy are given by: Q = 100 - P (demand) Q = 50 + 2P (supply) where Q denotes quantity and P denotes price. (a) Graph the Supply and Demand curves. Be sure to label everything. (b) If the world price is 10 what is the free trade level of imports? To find out trade, substitute P = 10 into the two equations. Demand equals 90 and domestic supply equals 70. Excess demand which equals imports would be 20 at a price of 10. (c) Suppose that the country imposes a quota of 11 units, how much will the domestic price rise? To find this price, set excess demand equal to 11 and solve for P.
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Unformatted text preview: Imports = 11 = (100 -P) -(50 + 2P) 3P = 100 -50 -11 = 39. P = 13. Thus price rises by 3. (d) What will be the welfare effects on this country of a quota of 11 units (e) Suppose instead that this country negotiates a VER of 11 units with its chief foreign supplier. What are the welfare effects of this policy? (d & e) The welfare effects include the deadweight loss and (possibly) the quota rents. Consumption DWL = ½*3*3 = 4.5 Production DWL = ½*6*3 = 9 Total DWL = 13.5 The quota rents = equivalent tariff*imports = 3*11 = 33. The welfare cost is either 13.5 (part d) or 46.5 (part e)....
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