Assume Australia is an importer of sofas and there are no trade restrictions. Australian consumers buy 1 000 000 sofas per year, of which 450 000 are produced domestically and 550 000 are imported.a Suppose that a technological advance among Swedish sofa manufacturers causes the world price of sofas to fall by $200. Draw a graph to show how this change affects the welfare of Australian consumers and Australian producers, and how it affects total surplus in Australia.b After the fall in price, Australian consumers buy 1 150 000 sofas, of which 300 000 are produced domestically and 850 000 are imported. Calculate the change in consumer surplus, producer surplus and total surplus from the price reduction.c If the government responded by putting a $200 tariff on imported sofas, what would this do? Calculate the revenue that would be raised and the deadweight loss. Would it be a good policy from the standpoint of Australian welfare? Who might support the policy?d Suppose that the fall in price is attributable not to technological advance but to a $200 per sofa subsidy from the Swedish Government to Swedish industry. How would this affect your analysis? low-priced foreign competition, and you are trying to get parliament to pass traderestrictions. Which two or three of the five arguments discussed in this chapter do youthink would be most persuasive to the average parliamentarian? Explain your reasoning.Copyright 2021 Cangage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in pathabsAH-20oRation: Internationaltb Now assume you are an astute student of economics (hopefully not a hard assumption).Although all the arguments for restricting trade have their shortcomings, name thetwo or three arguments that seem to make the most economic sense to you. For each,describe the economic rationale for and against these arguments for trade restrictions.5 The nation of Textilia does not allow imports of clothing. In its equilibrium without trade,a T-shirt costs $20, and the equilibrium quantity is three million T-shirts. One day, afterreading Adam Smith's The Wealth of Nations while on vacation, the president decides toopen the Textilian market to international trade. The market price of a T-shirt falls to theworld price of $16. The number of T-shirts consumed in Textilia rises to four million, whilethe number of T-shirts produced declines to one million.a llustrate the situation just described in a graph. Your graph should show all the numbers.b Calculate the change in consumer surplus, producer surplus and total surplus that resultsfrom opening up trade. (Hint. Recall that the area of a triangle is ½ x base x height.)6 China is a major producer of grains, such as wheat, corn and rice. Some years ago, theChinese Government, concerned that grain exports were driving up food prices fordomestic consumers, imposed a tax on grain exports.a Draw the graph that describes the market for grain in an exporting country. Use thisgraph as the starting point to answer the following questions.b How does an export tax affect domestic grain prices?How does it affect the welfare of domestic consumers, the welfare of domesticproducers and government revenue?d What happens to total welfare in China, as measured by the sum of consumer surplus,producer surplus and tax revenue?7 Consider a country that imports a good from abroad. For each of the following statements,say whether it is true or false. Explain your answer.a The greater the elasticity of demand, the greater the gains from trade.b if demand is perfectly inelastic, there are no gains from trade."C If demand is perfectly inelastic, consumers do not benefit from trade.'8 Having rejected a tariff on steel (a tax on imports), the Prime Minister of Isoland is nowconsidering the same-sized tax on steel consumption (including both imported anddomestically produced steel).a Using Figure 9.4, identify the quantity consumed and the quantity produced in Isolandunder a steel consumption tax.b Construct a table similar to that in Table 9.3 for the steel consumption tax.c Which raises more revenue for the government - the consumption tax or the tariff?Which has a smaller deadweight loss? Explain.9 Assume Australia is an importer of sofas and there are no trade restrictions. Australianconsumers buy 1 000 000 sofas per year, of which 450 000 are produced domestically and550 000 are imported.a Suppose that a technological advance among Swedish sofa manufacturers causesthe world price of sofas to fall by $200. Draw a graph to show how this change affectsthe welfare of Australian consumers and Australian producers, and how it affects totalsurplus in Australia.b After the fall in price, Australian consumers buy 1 150 000 sofas, of which 300 000 areproduced domestically and 850 000 are imported. Calculate the change in consumersurplus, producer surplus and total surplus from the price reduction.c If the government responded by putting a $200 tariff on imported sofas, what would thisdo? Calculate the revenue that would be raised and the deadweight loss. Would it be agood policy from the standpoint of Australian welfare? Who might support the policy?d Suppose that the fall in price is attributable not to technological advance but to a $200per sofa subsidy from the Swedish Government to Swedish industry. How would thisaffect your analysis?10 Consider a small country that exports steel. Suppose that a 'protrade' government decidesto subsidise the export of steel by paying a certain amount for each tonne sold abroad.How does this export subsidy affect the domestic price of steel, the quantity of steelproduced, the quantity of steel consumed and the quantity of steel exported? How doesit affect consumer surplus, producer surplus, government revenue and total surplus?(Hint: The analysis of an export subsidy is similar to the analysis of a tariff.)demsndr MarRets Grdeetfarerning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202

Demand and supply In an economy there is always a demand for goods and services and the supply of…

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Chapter1: Making Economics Decisions

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