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

This preview shows pages 1–5. Sign up to view the full content.

Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET 8 ANSWER KEY

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
5)
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
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

{[ snackBarMessage ]}

### Page1 / 5

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

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online