Problem 1. Suppose that Ireland is a small country in the sense that it has no influence on the world price. The domestic demand and supply functions for automobiles are given by Qd = 100-P and Qs = P-20 respectively.
Suppose further that Ireland decides to engage in open trade for automobiles with other countries at a world price of $30 per automobile.
a. What is the quantity of automobiles imported by Ireland?
b. Find the net gains from trade (to do this, first calculate consumer surplus and producer surplus without trade and then, calculate consumer surplus and producer surplus with trade and compare the difference in these calculations).
Now suppose that the government of Ireland wants to discourage automobile imports. Therefore, the government decides to impose a tariff of $10 on imported automobiles.
c. Find the quantity of automobiles imported with the tariff program.
d. Find the tariff revenue.
e. Find the deadweight loss from the tariff program.
Now suppose that instead of putting a tariff on imported automobiles, the government decides to use a quota program to limit the level of imports. The government announces that the number of imported automobiles cannot exceed 40.
f. Find the new equilibrium price of automobiles in Ireland and the quantity of imported automobiles.
g. Find the net gains from trade under the quota program (compared to no foreign trade). Compare the gains from trade with a quota to the gains from trade found in part b.
h. Compare the tariff program with the quota program. Which program is better for Ireland? Explain your answer.
Problem 2. Multiple choices:
1) The demand for wheat is given by P = 10 - Qd. Which price of Wheat yields the highest total revenue?
a. 3
b. 4
c. 5
d. 6
e. 7
2) The demand for cars in Japan is given by P = 20 - Qd. The demand for cars in the US is given by P=20-3Qd. Suppose that the supply of cars in both countries is identical and given by P = Qs. Suppose that both the US and Japanese governments decide to impose an excise tax of $4 on car producers. Which of the following statement is true?
a. The deadweight loss of the tax in the US is larger than in Japan.
b. The deadweight loss of the tax in Japan is larger than in the US.
c. The tax incidence falls more heavily on producers than consumers in Japan.
d. The tax incidence falls more heavily on producers than consumers in the US.
3) Consider the popcorn market. Suppose that the price of movie tickets decreases. Simultaneously, the price of corn increases. Then the equilibrium price will ___ and the equilibrium quantity will ____.
a. rise, rise
b. rise, fall
c. fall, fall
d. rise, not be determined
e. not be determined, not be determined
4) Suppose that the supply of wheat is given by Qs= 10+P and the demand for wheat is given by Qd = 40-2P. What is the point elasticity of demand in equilibrium?
a. 1/4
b. 1/2
c. 1
d. 2
e. 4
5) Suppose the demand for corn is given by P=10-Qd and the supply of corn is given by P=1+2Qs. Suppose further that the government sets the price floor at $5. Corn is traded at a price of______ and there is ________.
a. $6, excess supply of 3.
b. $6, excess demand of 3.
c. $7, excess supply of 3.
d. $7, excess demand of 3
e. $7, no excess supply or demand.