Suppose that the demand for bananas is described by P = 500−QD while supply is described...
Suppose that the demand for bananas is described by P = 500−QD while supply is described by P = 100 + 2QS. The world price of bananas is 200.
In dollars, how much water would there be with a tariff of 100%?
The limit of the tariff is the difference between the autarky equilibrium price and the world price (the prohibitive level), at which point imports cease. A tariff which would push the price beyond this level is said to have water in it. It can be lowered with no effect
Homework Answers
Given,
P = 500 - Qd => Qd = 500 - P
P = 100 + 2Qs => Qs = 0.5P - 50
At equilibrium,
Qd = Qs
=> 500 - P = 0.5P - 50
=> 500 + 50 = 0.5P + P
=> 550 = 1.5P
=> P = 550/1.5 = $366.67
Therefore, autarky equilibrium price = $366.67
World price = $200
Tariff would be levied on the world price.
Tariff levied = 100% (Therefore, the price of imports double)
Price of imports with 100% tariff = 2 * $200 = $400
Water with a ariff of 100% = Price with 100% tariff - Autarky equilibrium price = $400 - $366.67 = $33.33
Ans: $33.33
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