Use the information on the market for bicycles to answer the following questions.
Demand: P = -125*Q + 540; Supply: P = 150*Q + 210, where P is the price of bicycle and Q is the quantity demanded or supplied of bicycle.
- What are the equilibrium price and quantity? How many benefits do bicycle consumers and producers receive when the market is in the equilibrium?
- Small Country Case: Suppose the above functions represent the domestic demand and supply in the Turkish bicycle market.
a) Now assume the Turkey is trading with the rest of the world, the world price for bicycle is $300 per bike. As a small country, Turkey cannot affect the world price. Does Turkey want to import or export bicycle? Calculate the consumer surplus and producer surplus at the world price.
b) The Turkish government decides to impose a tariff of $30 per bicycle on imports. Calculate the new consumer surplus and producer surplus. Calculate the government tariff revenue. Calculate the deadweight loss.
c) Who pays the tariff? Consumer or producer? How much is the government tariff revenue?