100 points total 1. (40 points) Refer to the graph below to answer the following questions. Home's Import-Competing Industry Note: All curves are linear. Home is a “small country” in this market. PD and PW are prices domestically (that is, in autarky) and worldwide, respectively. a. Given that the demand and supply curves are linear, what are the values of the price at the intercepts A and F? [Hint: There is enough information on this graph to figure these values out, and the values are important to do the calculations below. Once you figure these out it might not be a bad idea to write down the equations of the curves in slope-intercept form. NOTE: F will be a negative number!!! It’s weird, but don’t worry about it. Proceed with the rest of the problem as usual.] b. With trade, what is the quantity of imports? c. What is the consumer surplus to H in autarky? What is CS with trade? d. What is the producer surplus to H in autarky? What is PS with trade? e. What are the gains from trade to H? Now suppose H imposes a tariff of 20% on imports of this good. f. g. h. i. 2. What is the quantity demanded after the tariff? What is the Consumer Surplus? How much is domestically supplied after the tariff? What is the Producer Surplus? What is the tariff revenue? How large is the deadweight loss from the tariff? (40 points) Suppose a “large country” H has an excess demand curve for good X given by P=70-2X. The worldwide excess supply curve for good X is P=10+X. a. Graph the curves. b. What is the free trade equilibrium quantity and price when there is no tariff? Mark the equilibrium on your graph as point A. c. What is consumer surplus when there is no tariff? d. A tariff of 20% is imposed on imports of good X. Mark the new equilibrium on the graph as point B. Calculate the equilibrium quantity, consumer price and producer price after the tariff. (Hint: We can analyze this by “shifting” the supply curve to P=1.20*(10+X). It is OK to get fractions of units.) e. What is the consumer surplus with the 20% tariff? What is the tariff revenue? [Hint: Start with the producer price you got in c. Multiply by .05 to get the tax per unit. Multiply by the number of units to get the revenue.] Add these together to get total welfare for the home country. Has welfare gone up for H due to the tariff? f. Now suppose the tariff is 100%. As in part d, mark the new equilibrium on the graph as point C. Calculate the equilibrium quantity, consumer price and producer price after the tariff. g. What is the consumer surplus with the 100% tariff? What is the tariff revenue? Add these together to get total welfare for the home country. Has welfare gone up for H due to the tariff? h. At point A, what is the price elasticity of supply? i. Given your answer for h, what is the “optimal” tax rate? That is, apply the inverse elasticity rule from the end of lesson 9 to the original equilibrium. [Technical note. Applying the inverse elasticity rule as I want you to do here with the original equilibrium will get us close to the “optimal.” But it is not exact. The inverse elasticity technically is the optimal rate to charge at the optimal post-tax equilibrium!! But actually solving for what that is non-trivial (remember, the elasticity of supply is changing along the supply curve). In this problem, it is .60, but that should not be your solution to this question.] j. Calculate the consumer surplus, tariff revenue and total surplus to H at the tax rate you calculated in i. 3. (20 points) Refer to the following graph for the Home country before and after a tariff. The home producer of the good is a monopolist prior to trade. a. Under free trade (prior to the tariff), the home country produces ________ and imports ________. b. The consumer surplus prior to the tariff is: c. According to the graph, the home country imposed a tariff of _____ dollars per unit, and the new quantity of imports is _____. d. After the tariff, what is the decrease in consumer surplus? e. After the imposition of the tariff, the home monopolist saw an increase in production of ______ and the producer surplus increased by ________. f. The home government collects ______ in tariff revenue. g. The deadweight loss due to the tariff is: