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chapter28questions

chapter28questions - 1 Suppose that the annual domestic...

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1. Suppose that the annual domestic demand for basketballs in Obamaland is given by Qd=50-0.5P and that the annual domestic supply basketballs is given by Qs=P-10, where Qd and Qs are measured in millions. a. If Obamaland is a closed economy (i.e. does not trade with the rest of the world), then what will be the price and quantity of basketballs sold in Obamaland? b. Suppose that the world price of basketballs equals $20 and that Obamaland is an open economy (i.e. trades with the rest of the world). i. What will be the price of basketballs sold in Obamaland assuming that the country is a price-taker in the world market for basketballs? ii. What will be the annual domestic consumption of basketballs in Obamaland? iii. How many basketballs will be imported into Obamaland each year? c. Now suppose that the government of Obamaland imposes a tariff of $10 per basketball. i. What will be the new price and quantity of basketballs sold in Obamaland? ii. What will be the annual domestic consumption of basketballs in Obamaland? iii. How many basketballs will be imported into Obamaland? [Hint: you should verify that the tariff reduces imports relative to the free trade outcome in part b.] iv. How much revenue does the government receive in tariff revenue? v. Who benefits from this tariff? Domestic producers or domestic consumers? Explain. d. Now suppose that instead of the tariff, the government of Obamaland imposes an import quota of 15 million basketballs per year. i. What will be the new equilibrium price of basketballs in Obamaland? ii. In terms of price, domestic consumption and the number of imports, how does the quota differ from the tariff in part c? iii. If the quota system is maintained by granting a limited number of import licenses, relative to the outcome under free trade how much total revenue will the quota generate for importers lucky enough to have import licenses? iv. Comparing your answers from part c and part d, what is the major difference between the tariff and the quota? a. Qd=Qs 50-0.5P=P-10 1.5P=60 P*=$40, Q*=30 (30 million basketballs). b. i. P=$20. ii. If P=$20, then Qd=40; 40 million basketballs.
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