Points Total 1–40 Points Refer To The Graph Below To Answer

Points Total1 40 Points Refer To The Graph Below To Answer The

100 Points Total1 40 Points Refer To The Graph Below To Answer The

Refer to the graph and associated data to analyze the import-competing industry in a small home country. Using the provided linear demand and supply curves, determine key equilibrium points, consumer and producer surpluses, and the impacts of trade policies such as tariffs. This includes calculating prices at intercepts, quantities imported, surpluses in autarky and with trade, and the effects of imposing tariffs, including deadweight loss. Additionally, examine the effects of tariffs in a large country context with given excess demand and supply curves, including the determination of free trade equilibrium, welfare changes under different tariff rates, and optimal tariff calculation. Lastly, analyze a monopoly scenario before and after a tariff, characterizing production, consumer surplus, government revenue, and deadweight loss.

Paper For Above instruction

The analysis of international trade policies hinges critically on understanding how tariffs influence domestic markets, consumer and producer surpluses, and overall welfare. This paper explores these aspects through a detailed examination of a small country's import-competing industry and a large country's trade dynamics, complemented by a monopoly case pre- and post-tariff implementation.

Part 1: Small Country’s Import-Competing Industry

Given the linear demand and supply curves, the initial step involves extracting the equilibrium prices at the intercepts A and F. The demand curve intercepts, A, typically represents the maximum willingness to pay when quantity demanded is zero, while F marks the highest supply price at zero quantity supplied. By analyzing the graph, one can determine the exact values for A and F, which are critical to deriving the equations of the curves. These equations are in slope-intercept form: P = mQ + b, where the slopes are derived from the linear curves, and b values are the intercepts.

Once the curves are defined, the autarky equilibrium is identified where demand equals supply, and the corresponding consumer and producer surpluses are computed. Consumer surplus in autarky is the area above the market price and below the demand curve up to the equilibrium quantity. Producer surplus is the area below the market price and above the supply curve up to the same quantity.

Trade introduces changes in the market, notably an increase in the quantity of imports. The quantity of imports is the difference between the total demand and domestic supply at the world price. Under free trade, the world price is given as PW, and the import quantity is directly obtained from the difference in quantities demanded and supplied at this price. Consumer surplus generally increases with trade because consumers benefit from lower prices and access to a wider selection of goods.

However, the gains from trade encompass both the consumer surplus gain and the producer surplus loss, reflecting the redistribution of welfare. The calculation of these surpluses considers the respective areas under the demand and supply curves at the world price, leading to a comprehensive understanding of trade benefits.

The introduction of a 20% tariff on imports alters market equilibrium. The new domestic demand after tariff must be recalculated at the increased domestic price, and the resulting quantity demanded and supplied are determined. This increased price reduces the quantity demanded and raises domestic producer surplus due to higher prices. The government collects tariff revenue by multiplying the tariff per unit by the imported quantity, which is diminished due to the higher tariff. Deadweight loss, representing economic inefficiency, is computed by analyzing the reduction in total surplus attributable to this policy, including the lost consumer surplus and the inefficiencies in over- or under-producing at inefficient quantities.

Part 2: Large Country with Excess Demand and Supply Curves

In the large country context, the excess demand curve, P=70-2X, and excess supply curve, P=10+X, characterize the market. The intersection point of these curves determines the free trade equilibrium, with the equilibrium quantity and price where demand equals supply. Graphically, this point is marked as A. The equilibrium prices are derived by setting the equations equal: 70 - 2X = 10 + X, yielding the equilibrium quantity and price.

Consumer surplus before tariffs is calculated by integrating the area between the demand curve and the equilibrium price, up to the equilibrium quantity. When a 20% tariff is applied, the supply curve shifts, and the new equilibrium (point B) is identified. This involves multiplying the original supply price by 1.2 to incorporate the tariff, and then solving for the new equilibrium quantity where the adjusted supply curve intersects the demand curve. The new consumer and producer prices are determined accordingly.

The effects of the 20% tariff on consumer surplus and tariff revenue are then analyzed. Consumer surplus diminishes due to higher prices, while tariff revenue increases proportionally with the tariff rate and the new import quantity. The total welfare change assesses whether the tariff benefits the home country, considering the potential deadweight losses from reduced consumption and excess production.

In contrast, a 100% tariff essentially prohibits imports, leading to a new equilibrium at a potentially different quantity and price (point C). The impacts on consumer surplus, tariff revenue, and overall welfare are recalculated under these conditions. The comparative analysis of different tariff levels reveals insights into economic efficiency and optimal policy design.

The elasticity of supply at the initial equilibrium (point A) is calculated using the demand and supply functions, providing a measure of responsiveness to price changes. These elasticities inform the determination of the optimal tariff, often approximated through the inverse elasticity rule, which suggests setting tariffs proportional to the ratio of elasticities to maximize welfare gains without inducing excessive deadweight loss.

Part 3: Monopoly Market Before and After Tariff

The final analysis considers a monopolist home producer operating before trade and after a tariff. Prior to trade, the monopolist maximizes profit where marginal revenue equals marginal cost, producing a quantity where the demand curve at that quantity determines the price. The initial consumer surplus, producer surplus, and government revenue are calculated based on this equilibrium.

Post-tariff, the monopolist faces higher costs or prices due to tariffs, leading to adjustments in production and pricing strategies. An increase in domestic production is expected, along with changes in the consumer surplus and producer surplus. The government collects tariff revenue, which is a function of the quantity imported and the tariff rate, now adjusted for the monopolistic setting.

The deadweight loss associated with the tariff, representing the loss of efficiency due to reduced consumption and excess production, is computed by comparing the pre- and post-tariff welfare metrics. This analysis underscores the welfare trade-offs in market interventions and the importance of balancing domestic industry support with broader economic efficiency.

Conclusion

The comprehensive examination of trade policies demonstrates that tariffs have nuanced effects depending on the market structure, size of the economy, and elasticities involved. While tariffs may benefit domestic producers and generate government revenue, they often come at the cost of reduced consumer surplus and deadweight loss, leading to overall welfare reductions. Careful analysis and precise calculations are essential for designing optimal trade policies that enhance welfare without inducing excessive inefficiencies.

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