Problem 1. A small open economy opens its banana market to trade. If the price of bananas in the world market is $2 per unit while the price of bananas in this small economy when it is closed is equal to $1, we can conclude that
a. Trade will benefit the domestic consumers in this small economy.
b. Trade will benefit the domestic producers in this small economy.
c. Total surplus in the small economy will increase with trade.
d. Answers (a) and (c) are both true.
e. Answers (b) and (c) are both true.
f. Answers (a), (b) and (c) are all true.
Problem 2. Given the information in question (1), this small economy will ___________ bananas once the banana market is open to trade.
a. import
b. export
Use the following information to answer the next three questions.
The domestic demand and domestic supply curve for books in a small closed economy are given by the following equations:
Domestic Demand: P = 200-2Q
Domestic Supply: P = 2Q
The world price of books is $20. Suppose this economy opens its book market to trade and simultaneously enacts a tariff of $20 per book.
Problem 3. Calculate the value of tariff revenue given the above information.
Problem 4. Calculate the value of consumer surplus when the book market is closed and the value of consumer surplus once the tariff is implemented. Do domestic consumers prefer the closed economy or the open economy with the tariff in this situation?
Problem 5. Calculate the deadweight loss from the tariff.
Problem 6. Suppose Joe’s income is $500 and he spends it on either movie tickets (M) or dinners out (D). If Joe spends all of his income on movie tickets he can afford 40 tickets and if he spends all of his income on dinners out he can afford 20 dinners.
a. What is the price of a movie ticket?
b. What is the price of a dinner?
c. Which of the following combinations of movies and dinners (M, D) are on Joe’s budget line? Circle the combinations that are on Joe’s budget line.
i. 10 M, 30 D
ii. 20 M, 15 D
iii. 10 M, 15 D
iv. 8 M, 16 D
d. Suppose that Joe maximizes his utility given the above information when he consumes 20 dinners. If the price of dinners changes to $40 Joe will maximize his utility by consuming 5 dinners. Write an equation for Joe’s demand curve for dinners given this information. Assume this demand curve is a linear demand curve.