Part 3: Monopoly power, or no? Consider a scenario very similar to Part 2: “Home" domestic demand is given by QD=240-P, but now there is only one "Home" producer of PPE, with marginal cost function MC=q. "Home" consumers can purchase PPE either from the domestic firm or from foreign producers at the constant world price of $80. a) Draw a diagram similar to Figure 9-3 from the textbook (and projected in class on Monday, November 2). How many units of PPE will be domestically produced, and how many will be imported, in the free-trade equilibrium? Compute the domestic producer surplus and the domestic consumer surplus in this equillbrium. b) Suppose the “Home" government imposes a tariff of $20 on each imported unit of PPE. Compute the effect of this tariff on total "Home" welfare (CS + PS + tariff revenue); show your work. c) Repeat your analysis from part c) for the case where, instead of a tariff, the “Home" government enforces a quota limiting imports to 40 units (but allowing the Home firm monopoly power over the remainder of the market). What price will "Home" consumers pay for each unit of PPE? Illustrate your answer with a new diagram.

Part 3: Monopoly power, or no? Consider a scenario very similar to Part 2: “Home" domestic demand is given by QD=240-P, but now there is only one "Home" producer of PPE, with marginal cost function MC=q. "Home" consumers can purchase PPE either from the domestic firm or from foreign producers at the constant world price of $80. a) Draw a diagram similar to Figure 9-3 from the textbook (and projected in class on Monday, November 2). How many units of PPE will be domestically produced, and how many will be imported, in the free-trade equilibrium? Compute the domestic producer surplus and the domestic consumer surplus in this equillbrium. b) Suppose the “Home" government imposes a tariff of $20 on each imported unit of PPE. Compute the effect of this tariff on total "Home" welfare (CS + PS + tariff revenue); show your work. c) Repeat your analysis from part c) for the case where, instead of a tariff, the “Home" government enforces a quota limiting imports to 40 units (but allowing the Home firm monopoly power over the remainder of the market). What price will "Home" consumers pay for each unit of PPE? Illustrate your answer with a new diagram.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter35: International Trade Restrictions

Section: Chapter Questions

Problem 11E

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Question

figure 9-3 included

Price
MC
Equilibrium
with tariff-
p" + t
** + t = MR`
a
pW
X*
:B
Free-trade
equilibrium
S, S2 D2 D,
Quantity
Imports with
tariff, M2
Imports (free trade), M,
FIGURE 9-3
Tariff with Home Monopoly Initially, under free trade at the fixed world price PW, the monopolist faces the
horizontal demand curve (and marginal revenue curve) X", and profits are maximized at point B. When a tariff t is
imposed, the export supply curve shifts up since Foreign firms must charge PW + t in the Home market to earn PW.
This allows the Home monopolist to increase its domestic price to PW + t, but no higher, since otherwise it would
lose all its customers to imports. The result is fewer imports, M,, because Home supply S increases and Home
demand D decreases. The deadweight loss of the tariff is measured by the area (b + d). This result is the same as
would have been obtained under perfect competition because the Home monopolist is still charging a price equal

Part 3: Monopoly power, or no?
Consider a scenario very similar to Part 2: "Home" domestic demand is given by QD=240-P, but
now there is only one "Home" producer of PPE, with marginal cost function MC=q.
"Home" consumers can purchase PPE either from the domestic firm or from foreign producers at
the constant world price of $80.
a) Draw a diagram similar to Figure 9-3 from the textbook (and projected in class on
Monday, November 2). How many units of PPE will be domestically produced, and how
many will be imported, in the free-trade equilibrium? Compute the domestic producer
surplus and the domestic consumer surplus in this equillbrium.
b) Suppose the “Home" government imposes a tariff of $20 on each imported unit of PPE.
Compute the effect of this tariff on total "Home" welfare (CS + PS + tariff revenue);
show your work.
c) Repeat your analysis from part c) for the case where, instead of a tariff, the "Home"
government enforces a quota limiting imports to 40 units (but allowing the Home firm
monopoly power over the remainder of the market). What price will "Home" consumers
pay for each unit of PPE? Illustrate your answer with a new diagram.

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