prblmset8answerkey - revenues = 6250. CS with no tariff =...

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Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET 8 ANSWER KEY
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5)
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a. Contract curve is straight line with slope of 2 . The only price ratio in equilibrium is 3 to 4 ( p c to p h ). b. 40 h , 80 c is on C.C. Jones will have 60 h and 120 c . c. 60 h , 80 c is not on C.C . Equilibrium will be between 40 h , 80 c (for Smith) and 48 h , 96 c (for Smith), as Jones will not accept any trades that make him worse off. U J = 4(40) + 3(120) = 520. This intersects the contract curve at 520 = 4( h ) + 3(2 h ), h = 52, c = 104. d. Smith grabs everything; trading ends up at O J on C.C . 6) a. Domestic Equilibrium 150 P = 5000 100 P P = 20 Q = 3000 (i.e., 3 million) b. Price drops to 10, Q D = 4000 Domestic production is 150(10) = 1500. Imports = 2500. c. Price rises to 15, Q D = 3500 Domestic production = 150(15) = 2250. Imports = 1250 Tariff
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Unformatted text preview: revenues = 6250. CS with no tariff = .5(4000)(50 – 10) = 80,000 CS with tariff = .5(3500)(50 – 15) = 61,250 Loss = 18,750 Transfer to producers = 5(1500) + .5(2250 – 1500)(15 – 10) = 9,375 Deadweight loss = Total loss – Tariffs – Transfer = 3,125 Check by triangles Loss = .5(2250 – 1500)(5) + .5(4000 – 3500)(5) = 1875 + 1250 = 3125 d. With quota of 1250, results duplicate part c except no tariff revenues are collected. Now 6250 can be obtained by rent seekers. 7) a. The long-run equilibrium price is 10 + r = 10 + .002 Q . So, Q = 1050 – 50(10 + .002 Q ) = 550 + .1 Q so Q = 500, P = 11, r = 1. b. Now Q = 1600 – 50(10 + .002 Q ) = 1100 + .1 Q Q = 1000, P = 12, r = 2. c. Change in PS = 1(500) + .5(1)(500) = 750. d. Change in rents = 1(500) + .5(1)(500) = 750. The areas are equal....
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prblmset8answerkey - revenues = 6250. CS with no tariff =...

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