Question 1 (tariff, quota, VER, in the small country case) Suppose the demand curve for coffee in Laos is D = 300 - 5P The supply curve is S = -50+5P a) Calculate the equilibrium price and quantity of coffee when Laos is in autarky. Now suppose Laos is a small country, and hence unable to affect world price of coffee. The world price of coffee is $25 per bag. b) Determine the free trade equilibrium values of the following variables: amount produced domestically, amount consumed, amount imported, and the price at which it imports coffee. Now suppose Laos imposes a tariff of $5 per bag on imported coffee. c) Determine the values of the following variables: amount produced domestically, amount consumed, amount imported, the price of coffee in Laos, tariff revenue, consumption distortion loss, production distortion loss, and total welfare loss. Show the results diagrammatically. Suppose instead of a tariff, the government decides to use a quantitative restriction. It imposes a quota of 70 bags and auctions the quota license to the highest bidder. d) Determine the values of the following variables: amount produced domestically, amount consumed, amount imported, the price of coffee in Laos, revenue raised from quota auctions, consumption distortion loss, production distortion loss, and total welfare loss. Show the results diagrammatically. Now suppose that instead of a quota, the government of Laos enters into a Voluntary Export Restraint (VER) whereby the government of Indonesia (which is the exporter of coffee to Laos) agrees to restrict the export of coffee to 70 bags. How would the results in part d) change? Is the welfare of Laos higher in the case of a quota or a VER?
Question 1 (tariff, quota, VER, in the small country case) Suppose the demand curve for coffee in Laos is D = 300 - 5P The supply curve is S = -50+5P a) Calculate the equilibrium price and quantity of coffee when Laos is in autarky. Now suppose Laos is a small country, and hence unable to affect world price of coffee. The world price of coffee is $25 per bag. b) Determine the free trade equilibrium values of the following variables: amount produced domestically, amount consumed, amount imported, and the price at which it imports coffee. Now suppose Laos imposes a tariff of $5 per bag on imported coffee. c) Determine the values of the following variables: amount produced domestically, amount consumed, amount imported, the price of coffee in Laos, tariff revenue, consumption distortion loss, production distortion loss, and total welfare loss. Show the results diagrammatically. Suppose instead of a tariff, the government decides to use a quantitative restriction. It imposes a quota of 70 bags and auctions the quota license to the highest bidder. d) Determine the values of the following variables: amount produced domestically, amount consumed, amount imported, the price of coffee in Laos, revenue raised from quota auctions, consumption distortion loss, production distortion loss, and total welfare loss. Show the results diagrammatically. Now suppose that instead of a quota, the government of Laos enters into a Voluntary Export Restraint (VER) whereby the government of Indonesia (which is the exporter of coffee to Laos) agrees to restrict the export of coffee to 70 bags. How would the results in part d) change? Is the welfare of Laos higher in the case of a quota or a VER?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 1 (tariff, quota, VER, in the small country case)
Suppose the demand curve for coffee in Laos is
D = 300 - 5P
The supply curve is
S = -50+5P
a) Calculate the equilibrium price and quantity of coffee when Laos is in autarky.
Now suppose
Laos is a small country, and hence unable to affect world price of coffee. The
world price of coffee is $25 per bag.
b) Determine the free trade equilibrium values of the following variables: amount
produced domestically, amount consumed, amount imported, and the price at which it
imports coffee.
Now suppose Laos imposes a tariff of $5 per bag on imported coffee.
c) Determine the values of the following variables: amount produced
domestically, amount consumed, amount imported, the price of coffee in Laos, tariff
revenue, consumption distortion loss, production distortion loss, and total welfare loss.
Show the results diagrammatically.
Suppose instead of a tariff, the government decides to use a quantitative restriction. It
imposes a quota of 70 bags and auctions the quota license to the highest bidder.
d) Determine the values of the following variables: amount produced
domestically, amount consumed, amount imported, the price of coffee in Laos, revenue
raised from quota auctions, consumption distortion loss, production distortion loss, and
total welfare loss. Show the results diagrammatically.
Now suppose that instead of a quota, the government of Laos enters into a Voluntary Export
Restraint (VER) whereby the government of Indonesia (which is the exporter of coffee to Laos)
agrees to restrict the export of coffee to 70 bags.
How would the results in part d) change? Is the welfare of Laos higher in the
case of a quota or a VER?
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