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Econ 101: Principles of Microeconomics Fall 2012

This document contains an economics homework assignment with 3 problems about trade policies involving South Korea, Ecuador, and Saudi Arabia. Problem 1 involves calculating trade quantities and surpluses for South Korea under free trade and a $1 tariff on baseball hats. Problem 2 does the same for Ecuador imposing a tariff to protect domestic shrimp production. Problem 3 examines Saudi Arabia's trade in oil under free trade and an export ban, identifying who favors each policy - producers or consumers.

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104 views

Econ 101: Principles of Microeconomics Fall 2012

This document contains an economics homework assignment with 3 problems about trade policies involving South Korea, Ecuador, and Saudi Arabia. Problem 1 involves calculating trade quantities and surpluses for South Korea under free trade and a $1 tariff on baseball hats. Problem 2 does the same for Ecuador imposing a tariff to protect domestic shrimp production. Problem 3 examines Saudi Arabia's trade in oil under free trade and an export ban, identifying who favors each policy - producers or consumers.

Uploaded by

wwongvg
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Econ 101: Principles of Microeconomics Fall 2012

Homework #4 Not Due

Problem 1: South Korea has the following domestic supply and demand for baseball hats:
𝑃𝑑 = 20 − 2𝑄𝑑 , 𝑃𝑠 = 5 + Q s
The world price for baseball hats is 7 dollars.
(1) Initially, what is the number of baseball hats that South Korea imports/exports? How many
baseball hats are made by domestic Korean companies?
(2) What is the consumer surplus? The domestic producer surplus?
(3) The government wants to protect domestic production of baseball hats and decides to impose a $1
tariff on foreign baseball hat makers. How does this change the consumer and producer surplus?
How much revenue does the government raise? (Hint: Make a table with quantities or labeled
areas).
(4) As with most government policies, there are winners and losers from the adoption of tariffs.
Using the information from your answer to (3), who favors tariffs: domestic consumers or
domestic producers of baseball hats?
(5) The tariff idea gets shot down by the legislature. So the government decides to implement a quota
restricting the quantity of hats that may be imported to 2. What is:
a. the quantity of baseball hats produced domestically;
b. domestic consumer and producer surpluses; and
c. how much is the quota rent?
d. What is the main difference between these tariff and quota policies?

Problem 2: The government of Ecuador wants to protect its domestic production of shrimp against
foreign competition. The world price is 12 (in millions of dollars). The government sets a target quantity
of 4 million pounds of shrimp (Q=4). The domestic inverse supply and demand (in millions of pounds of
shrimp) is given by:
𝑃𝑑 = 23 − 𝑄𝑑
𝑃𝑠 = 3 + 3𝑄𝑠
(1) If there are no governmental restrictions, what quantity of shrimp will be imported into Ecuador
and how many shrimp will Ecuador produce domestically?
(2) Find a tariff such that 4 million pounds of Ecuadorian shrimp will be sold to domestic consumers,
and calculate the resulting change in consumer surplus, producer surplus and government revenue.

Problem 3: The country of Saudi Arabia can produce oil more cheaply than can most other countries.
Let the world price of oil be 100 dollars a barrel, and say the domestic supply and demand for Saudi
Arabia are given by:
1
𝑃𝑠 = 70 + 𝑄𝑠 , 𝑃𝑑 = 100 − 𝑄𝑑
2
(1) Assume that Saudi Arabia follows a free trade policy. How many barrels of oil will Saudi Arabia
export? What are the domestic consumer’s surplus and the producer’s surplus?
(2) What if Saudi Arabia changes its commitment to free trade and decides to close off its oil supply
to the world, allowing no oil to leave the country? What happens to consumer and producer
surplus?
(3) In this case, who is in favor of the governmental restriction: producers or consumers?

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