Question

(2) DeCecco is a small country which is currently not trading. The country makes pounds of dry pasta. The demand for pasta is a = 100 - 10P, and the supply of pasta is Os = 10P - 20 where the units for Od and Qs is millions of pounds. raw the demand and supply curves for pasta in DeCecco country. In autarkv what is the equilibrium price, quantity demanded and quantity supplied for pasta? Is there a difference in quantity demanded and supplied? Why or why not? b. Calculate the amount of producer surplus and consumer surplus in autarky. C. The government of DeCecco decides to open its borders and trade with other countries. It finds that world price for pasta is $3. What is now the equilibrium price, quantity demanded and (domestic) quantity supplied for pasta? Is there a difference in quantity demanded and supplied? Why or why not? d. What is amount of producer surplus and consumer suplus with international trade? Who has gained and who has lost in the Dececco pasta market by opening up to trade? e. Suppose the government of Dececco imposes a $1 tariff on the import of pasta. What is now the equilibrium price, quantity demanded and (domestic) quantity supplied for pasta? Why are these amounts different from the answers in part d? f. With the tariff in place what is the producer surplus, consumer surplus, and tariff revenue? What is the amount of deadweight loss. Indicate the deadweight loss and tariff revenue on the graph from part a.

Answer 1

a) Set QD=QS

100-10P=10P-20

100+20 = 10P+10P

120 = 20P

Equilibrium P = 120/20 = 6

Equilibrium Q = 100-10*6 = 40

Maximum reservation price = 10

Minimum reservation price = 2

2	80	0
3	70	10
4	60	20
5	50	30
6	40	40
7	30	50
8	20	60
9	10	70
10	0	80

In autarky, there is no difference in demand and supply as the price is set at the equilibrium level where QD=QS

b) CS = 0.5*40*(10-6) = 80

PS = 0.5*40*(6-2) = 80

c) When the world price is 3,

Equilibrium price = 3 as the country will become an importer

Quantity demanded = 70

Quantity supplied = 10

There is a difference of 70-10 = 60 units as the equilibrium price is lower than the domestic price at which quantity demanded will exceed quantity produced.

d) CS = 0.5*70*(10-3) = 245

PS = 0.5*10*(3-2) = 5

Consumers gains and Producers loses

As per HOMEWORKLIB RULES, first four parts are answered.