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1 ECF1100: MICROECONOMICS Answers to tutorial 9 Chapter 8, Problem 5 a. To find the price of a car, set demand equal to supply: 12,000 – 200 P = 7000 + 50 P . From this, we obtain P = 20. b. At a world price of 18 units, domestic quantity demanded is 12,000 – 200(18) = 8400 cars, and domestic quantity supplied is 7000 + 50(18) = 7900 cars. The difference (500 cars) must be imported. Because the world price of cars is lower than the domestic price, domestic consumers will favour the opening to trade and domestic car producers will oppose it. c. The domestic price of cars is now equal to the world price plus the tariff; that is, 18 + 1 = 19 units. Quantity demanded is 12,000 – 200(19) = 8200 and quantity supplied is 7000 + 50(19) = 7950. The difference, 250 cars, is imported (so imports have fallen). The tariff raises the domestic price so domestic consumers will oppose it and domestic car producers will support it. The government benefits from the tariff, as it collects 1 unit × 250 cars = 250 units of tariff revenue. d.

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