HW10_sol - Intermediate Microeconomics(ECON 401 Winter 2008...

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Unformatted text preview: Intermediate Microeconomics (ECON 401), Winter 2008 Problem Set No. 10: Solutions Problems (9.24) In 2004 the Bush administration made a preliminary ruling that China and Vietnam were dumping shrimp in the United States at below their costs, and proposed duties as high as 112%. Suppose that China and Vietnam were subsidizing their shrimp fishers. Show in a diagram who gains and who loses in the United States (compared to the equilibrium in which those nations do not subsidize their shrimp fishers). Currently, the United States imposes a 10.17% antidumping duty (essentially a tariff) on shrimp from these and several other countries. Use your diagram to show how the large tariff would affect government revenues and the welfare of consumers and producers. 1 See the above figure, which is a relabeled version of Figure 9.9, on p. 314 of Perloff. Before either the subsidy or the tariff, the competitive equilibrium in the U.S. shrimp market is at point e 3 , with p = $19.70 and Q = 11.8. Consumer surplus is A + J . Producer surplus is B + F (see Figure 9.8 in the textbook). Total welfare is A + J + B + F . Then two policies are enacted. First, foreign producers (China and Vietnam) subsidize their shrimp production, which shifts the foreign supply curve down from S 3 to S 3 with a subsidy . This leads to a decline in the world price, from $19.70 to $14.70. This downward shift of supply increases consumer surplus, and decreases producer surplus in the U.S. The increase in consumer surplus is B + C + D + E , and the decrease in producer surplus is B . Consumers gain from the subsidy and domestic producers lose. Welfare increases in the U.S. because the gain in consumer surplus is larger than the decrease in producer surplus, so the net gain in welfare is C + D + E . Finally, the U.S. imposes a tariff. The tariff, τ , is set at $5.00. This is enough to exactly offset the subsidy, and move the foreign supply curve back up to its original position, S 3 , with p = $14.70 + $5.00 = $19.70. Compared to the equilibrium with the subsidy, e 1 , the tariff decreases consumer surplus, increases producer surplus, increases tariff revenues, and incurs a deadweight loss. Con- sumer surplus decreases by B + C + D + E (exactly the increase under the subsidy). Producer surplus increases by B (exactly the decrease under the subsidy). Tariff revenues increase from zero to D , and the deadweight loss is C + E . Overall, after these two policies are enacted, there is a net gain in welfare, relative to the competitive equilibrium, and that net gain is D . (9.26) Using the information in the “Deadweight Loss from Wireless Taxes” application, draw graphs to illustrate why the tax on landlines creates almost no deadweight loss whereas the tax on cell phones creates more substantial deadweight loss....
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HW10_sol - Intermediate Microeconomics(ECON 401 Winter 2008...

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