ec-23 - Homework #8 Answers E201 Spring 2009 The problems...

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Homework #8 Answers E201 Spring 2009 The problems below draw from the material in Chapters 9 and 10 and accompanying lectures. 1. The world price of cotton is below the no-trade price in Great Britain and above the no- trade price in Peru. Using supply and demand diagrams and welfare tables such as those in Chapter 9, show the gains from trade in each country. Compare your results for the two countries. Q P S P 1 D World Price Cotton in Great Britain C A B D Q P S D World Price Cotton in Peru E F H G P 2 Great Britain: Before Trade After Trade Change Consumer Surplus A A+B+C +(B+C) Producer Surplus B+D D -B Total Surplus A+B+D A+B+C+D +C Peru: Before Trade After Trade Change Consumer Surplus E+F E -F Producer Surplus B F+G+H F+G Total Surplus E+F+H E+F+G+H +G Both countries have a net gain from trade. 2. Suppose that Congress imposes a tariff on Japanese motorcycles to protect the U.S. motorcycle industry from foreign competition. Assuming that U.S. and Japanese
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motorcycles are homogeneous (perfect substitutes), use a diagram of the market for motorcycles sold in the U.S. to show the effect of this tariff on the following: the quantity of Japanese imports, the quantity of domestically produced motorcycles, the price of motorcycles in the U.S., government revenue , and the deadweight loss . What does the deadweight loss represent? Price in US rises by the amount of the tariff. World price does not (why?). Before tariff: Japanese imports = Qd 1 – Qs 1 Domestic output = Qs 1 After tariff: Japanese imports = Qd 2 – Qs 2 (smaller than before) Domestic output = Qs 2 (bigger than before) Tax revenue is area E. Deadweight loss from tariff is D+F. This is a loss of gains from trade (in this case, all CS) that would have occurred in absence of the tariff, but doesn’t occur because of the tariff. In terms of resource allocation, too many resources in the US are devoted to motorcycle production; without the tariff, these resources would be employed in the production of a higher-valued output . 3. Alcohol consumption is directly related to motor vehicle accidents; thus, greater consumption of alcohol imposes costs on people who do not drink and drive. a.
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This note was uploaded on 04/19/2011 for the course ECON 200 taught by Professor Staff during the Winter '09 term at Indiana.

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ec-23 - Homework #8 Answers E201 Spring 2009 The problems...

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