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PS4 source - Econ 441 Summer Term 2002 Alan Deardorff Final...

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Econ 441 Alan Deardorff Summer Term 2002 Final Exam - Answers Page 1 of 11 Final Exam - Answers August 15, 2002 Answer all questions, in blue book. Plan ahead and budget your time. The questions are worth a total of 90 points, as indicated. You will have 120 minutes to complete the exam. 1. [18 points] The figure on the next page shows domestic demand and supply curves for a country. (The same figure appears twice on the page, for your convenience.) Use them, together with the grid for measuring prices, quantities, and areas, to give numerical answers the questions below, assuming that The world price of the good is $8 per ounce. The country is small. When it initially trades, the country levies a tariff on imports of $4 per ounce. You should show your work if you want a chance for partial credit for wrong answers. a. (2 points) What is the country’s autarky price? Equals price at intersection of domestic supply and demand: $18. b. (4 points) With trade and with the $4 tariff, what is the domestic price, and what quantity does the country import? Domestic price equals world price plus tariff: $8 + 4 = $12. At that price, reading off the figure, domestic supply is 10 and domestic demand is 19, so imports are 19-10 = 9. c. (8 points) Suppose that the size of the tariff is increased from $4 to $8, the world price remaining unchanged. Find the following changes that are due to this tariff increase (you are not comparing here to free trade, but rather to the initial situation with the $4 tariff): Price rises to 8+8 = $16; supply rises to 14 and demand falls to 17, so imports fall to 3 i. The change in welfare of suppliers. Area “a” = +$48 ii. The change in welfare of demanders. Area –“a+b+c+d” = –$72 iii. The change in tariff revenue. Area “c+f” minus “e+f+g” = “c–(e+g)” = 12–24 = –$12 iv. The change in welfare of the country as a whole.
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Econ 441 Alan Deardorff Summer Term 2002 Final Exam - Answers Page 2 of 11 Sum of the above = 48–72–12 = –$36 d. (2 points) Suppose that in part (c) the new tariff had been $12 instead of $8. What would the change in welfare of suppliers (compared again to the initial $4 tariff) have been in that case? Imports are now available only for 8+12=$20, which is above the autarky price. At a domestic price of $20 there would be excess supply of the good, and the market would not clear, since suppliers cannot sell abroad for more than $8. Therefore the tariff is “prohibitive,” and the domestic price rises only to its autarky level, $18. The change in welfare of suppliers is therefore “a+h”=+$78 e. (2 points) Suppose that the country were to replace its tariff with a quota permitting imports of 6 ounces of the good. What would be the tariff equivalent of that quota? Domestic price must now rise to a level such that the demand for imports
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This note was uploaded on 02/23/2011 for the course ECON 301 taught by Professor S.chiu during the Spring '11 term at HKU.

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PS4 source - Econ 441 Summer Term 2002 Alan Deardorff Final...

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