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1. Draw demand and supply curves to find the world price and tariff price of your goods. Suppose at the world price of $13; 10,500 units are produced domestically, and 16,700 units are consumed. When a tariff of $2 per unit causes the price to rise to $15, domestic production rises to 12,000 units, and domestic consumption falls to 14,500 units.
a. Form the demand and supply functions. (10 points)
b. Draw demand and supply and find equilibrium price and quantity? (5 points)
c. Calculate consumer surplus and producer surplus at the world price. (10 points)
d. Calculate consumer surplus and producer surplus at the tariff price. (10 points)
e. Mark the government tariff revenues on your graph. What is the value of tariff revenue in this question? (5 points)
2. Suppose U.S. is importing crude oil. The demand and supply functions are as following:
Demand: P = 400 – 0.05Q
Supply: P = 10 + 0.028Q
The world price for crude oil is $80 per unit.
a. Draw demand and supply curves and find the market price for crude oil in the U.S. without trade. (10 points)
b. Trade opens. Calculate how many crude oil that the U.S. is importing. (10 points)
c. The U.S. sets an import quota of 2400 units on the crude oil that are imported. Find the tariff equivalent price of quota. (10 points)
3. Indonesia is importing digital recorder from Japan because of the low price. The demand for digital recorder in Indonesia: P = 5 – 0.0375Q and the supply for digital recorder in Indonesia: P = 0.5 + 0.01875Q, where P is the price of the digital recorder in millions of Indonesian rupiah (IDR) and Q is the quantity of the digital recorder traded in millions of units.
The price of the digital recorder that Indonesia can get from Japan is 1 million IDR and Indonesia imposes the tariff of 0.5 million IDR on the price of the imports.
Now, Indonesia forms an FTA agreement with Singapore to the exclusion of Japan. Singapore has a higher cost of production than Japan. The price of the digital recorder in Singapore is 1.2 million IDR. FTA agreement states that all trade restrictions are abolished between Indonesia and Singapore, so no tariffs for either country.
a. Calculate how much quantity of trade is created. (10 points)
b. Calculate how much quantity of trade is diverted from Japan to Singapore. (10 points)
c. Calculate the quantity of extra consumption. (10 points)