Chapter 1. Chapter 16, 15(26)

Step 1

My Slide Activities

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You must read each slide, and complete any questions on the slide, in sequence.

Question

Suppose that a country produces a product whose equilibrium price is P^A. It then opens to trade, and is able to import the product at the price P^W. The corresponding graph is shown below. The supply of product (S) curve and demand for product (D) curve are shown in the graph.

The graph shows the supply and demand curves for a product. The horizontal axis is labeled Quantity, and the vertical axis is labeled Price. Points Q1 to Q5 are indicated on the horizontal axis, with Q1 at 3 units from the origin point, followed by Q2, Q3, Q4, and Q5 in single unit increments. The vertical axis has three points indicated, starting with Pw at 2 units from the origin point, followed by Pw +T, and Pa in single unit increments. Dotted lines are drawn horizontally from these points on the vertical axis, and extend towards the supply and demand curves. The supply and demand curves intersect at a point corresponding to Q3 on the horizontal axis and Pa on the vertical axis. A plus sign indicates this point of intersection. The area below the point of intersection of the demand and supply curves is divided into four: Area H is the rectangle whose length corresponds to 2 units from points Q2 and Q4 on the horizontal axis, and a height of 1 unit from points Pw to Pw+T. Area J is the triangle formed by the intersection of the demand and supply curves above the area H. The base of this triangle corresponds to 2 units from points Q2 and Q4 on the horizontal axis, and a height of 1 unit from points Pw+T to Pa. Area G is the triangle to the left of the area H. The base of this triangle corresponds to 1 unit from points Q4 and Q5 on the horizontal axis, and a height of 1 unit from points Pw to Pw +T. Area I is the triangle to the right of the area H. The base of this triangle corresponds to 1 unit from points Q1 and Q2 on the horizontal axis, and a height of 1 unit from points Pw to Pw +T.

The trade price, P^W, is HAJ/MMguR3KagCnQYMX1MPrtH50vuvCZ9bKe2olxA3eeIU1YBo7Azg== the pre-trade price, and trade AUOefvMc1ESKXRP3f93gBedGzNTwQDGB1tDzcCSn/jG16bUgjI1M8g== consumer surplus.

Here, P^W is lower than the autarky price, P^A. As a result, the “height” of the consumer surplus triangle is larger, resulting in a larger triangle.

Step 2

Question

This country, given P^W, will u3RAdkjyIqDFa3gJHChMRtlEolFLLAteCsJlxy92r9Lv7cB0L20AezXq5QSIc0BqtuRq5L9+nCdCccpE.

Since the world price is lower, the good becomes cheaper from abroad and this country will import it.

Step 3

Question

The increase in total welfare with trade is depicted by the area(s) aBvXTbAEzRxff/kANWU2A7GMgn8vqfOfnbYvBjU6ZH/2W8SIdkTaRbSpAJQtusiqvsh3VuP4XkDuCkl4iIvqcO37Q/8TbLJ9m2GYvvlg/8dsdNRRjLRzq7HKh7KYHoUY/vKzs94BxogOL1i1FUlXtVL+HcQfl/rOReOf2S6xKVQ=.

The increase in welfare is the large triangle containing all four parts.

Step 4

Question

The quantity of imports is s4KP2z+o/ZohaeUPIBl0SvXTrhPnh+vF7o0iQGe1u286RfCkK0ym94oQ+28lcmt1eKTmaEWHdfBH4TGaMB07fRY63Tw07IKp7eBXSbeaoJNOm3jdbGmRzOmiNRZb85wcfDUIaIqWuM7J7BgIPpENM40I/zjOIm+g9lbIhw==.

The quantity of imports equals the quantity demanded by this country’s consumers minus the quantity supplied by this country’s producers. At P^W, this value is Q₅-Q₁ or the gap between domestic quantity demanded and quantity supplied.

Step 5

Question

Now assume that this country restricts this trade with a tariff of the amount T. The quantity of imports is now 84vpoU4ttpYcP+ARvL7WyCGpGsOIPPIL7txc0z7a9Y5x5FM+IeQ2JNTxA/uZ23xcrgvVfWZMrnVizgLrTR78EaZR4NVHklgl01B5gYfKAfhOp0ruBQ20iRLbXLEZT3LGPfr8OO386BhVGkg5AerXPO9KDfcVkb3o572q/nTU89YfVdrnixYDMA==.

The tariff is intended to raise the good’s price in the domestic market, which reduces quantity demanded and encourages more domestic production. The gap between quantity demanded and quantity supplied still represents imports, but quantity supplied is now Q₄ and demand is now Q₂.

Step 6

Question

With a tariff, triangle G is Pz1moyN5o+ZyZ3v8IpW6ur2SknTKrSqEb/vfetrtc0aB9SRcQe3hAaBSekihP/qthpb5Q+dtRmz5MHVtWtN0vuMJyCpOFJEH.

Deadweight loss results from transactions that could not take place, and therefore do not result in increased utility for buyers or sellers. Here, since lower-cost imports are replaced with higher-cost domestic production, this represents a loss of efficiency.

Step 7

Question

With a tariff, rectangle H is lVRhmOVod8uGIiwTBqO56+78RSDdWGXqmRt4otLtrLrfA8ZAGoNCIEes4DDxjijxjzpk1Wrm28lgdmy224dII1qqBjBz+Qkh.

This box’s height is the amount of the tariff, and its base is the quantity of imports after the tariff. Multiplied together (dollars per unit times the number of units), this gives the total tariff revenue collected by the government.

Step 8

Question

With a tariff, triangle I is Pz1moyN5o+ZyZ3v8IpW6ur2SknTKrSqEb/vfetrtc0aB9SRcQe3hAaBSekihP/qthpb5Q+dtRmz5MHVtWtN0vuMJyCpOFJEH.

Deadweight loss results from transactions that could not take place, and therefore do not result in increased utility for buyers or sellers. Here, the tariff raises the price that consumers pay, so some choose not to buy it at the higher price. They therefore do not receive any consumer surplus. This triangle has a base with the number of the lost imports, and a height of the cost of the tariff.

Step 9

Question

With a tariff, triangle J is D5sADEuPVK7641iFao7H/qt6Kx9FmiPyry5tTuaxepwTagaJjLCXjop1SXJ7Lk2NkIJQ4WoRZ+9eQ+mktv6kKVyIxqFs84C6.

Even with this tariff, which does not raise the price to the pre-trade market price, there are some remaining imports. These generate consumer surplus for domestic purchases.