b If nation C allow for free trade The world price of car is 10 How many cars

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. b. If nation C allow for free trade. The world price of car is 10. How many cars will nation Cimport? Use a diagram to illustrate the effect. Calculate consumer surplus, (domestic) producer surplus. At p w = 10, the quantity demand is . At p w = 10, the domestic car quantity supply is . So 40 units of car are imported.

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4 Consumer gets better off, but domestic producer are worse off. c. The domestic car producers successfully convinces the government to product “infant indus- try”. The government decides to impose a tarriff of 5 on each car imported. Illustrate the new equilibrium on the graph you draw for (b), how many cars will nation C import? How much tariff revenue will the government collected? The price of foreign car rise to 15. So q D = 50, q S = 30, so import 20 cars. The government can collect 20 × 5 = 100 tariff revenue. d. If the government replace the policy of tariff by a import quota of 20. Compare to the tariff case in (c), which party is worse-off? Which party is better-off? The government is worse-off because there is not tariff revenue. The foreign car producers are better-off. 12.2 Given the cost function 2 . C q wq = + a. Differentiating total cost gives marginal cost: 2 . MC q w = + Substituting 10, w = 2 10 . C q q = + 2 10. MC q = + Set MC P = and solve for the firm’s (short -run) supply curve: 2 10 0.5 5. q P q P + = = The industry’s supply curve is 1000 1 500 5,000. Q = q = P At 20, P = 5,000. Q = At 21, P = 5,500. Q = b. Here, 2 0.002 . MC q Q = + For profit maximum, set MC P = : 0.5 0.001 . q P Q = The industry supply curve is 1000 1 500 . Q = q = P Q 250 . Q = P If 20, P = 5,000. Q = If 21, P = 5,250. Q = Supply is more steeply sloped in the case where expanded output bids up wages.
5 12.3 Demand: or 0 ( 0), Supply: or 0 ( 0).

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