illustrates the demand and supply schedules for television sets in Venezuela, a "small" nation that is unable to affect world prices. On graph paper, sketch Venezuela's demand and supply schedules of television sets.
VENEZUELA SUPPLY OF AND DEMAND FOR TELEVISION SETS
Price per TV Set Quantity Demanded Quantity Supplied
$100 900 0
200 700 200
300 500 400
400 300 600
500 100 800
a. Suppose Venezuela imports TV sets at a price of $150 each. Under free trade, how many sets does Venezuela produce, consume, and import? Determine Venezuela's consumer surplus and producer surplus.
b. Assume that Venezuela imposes a quota that limits its imports to 300 TV sets. Determine the quota-induced price increase and the resulting decrease in consumer surplus. Calculate the quota's redistributive effect, consumption effect, protective effect, and revenue effect. Assuming that Venezuelan import companies organize as buyers and bargain favorably with competitive foreign exporters, what is the overall welfare loss to Venezuela as a result of the quota? Suppose that foreign exporters organize as a monopoly seller. What is the overall welfare loss to Venezuela as a result of the quota?
c. Suppose that, instead of a quota, Venezuela grants its import-competing producers a subsidy of $100 per TV set. In your diagram, draw the subsidy-adjusted supply schedule for Venezuelan producers. Does the subsidy result in a rise in the price of TV sets above the free-trade level? Determine Venezuela's production, consumption, and imports of TV sets under the subsidy. What is the total cost of the subsidy to the Venezuelan government? Of this amount, how much is transferred to Venezuelan producers in the form of producer surplus, and how much is absorbed by higher production costs due to the inefficient domestic production? Determine the overall welfare loss to Venezuela under the subsidy.