Chapter 9, Problem 10PA

(a):

To determine

The impact of technological advancement on TV production.

Explanation of Solution

When the technological advancement in production reduces the world price of televisions, the impact on the importer will be as follows: the importing price will fall, which will reduce the domestic price for televisions; this will increase the demand for the televisions and increase the consumer surplus as well as the total surplus. Further fall in the domestic price will reduce the domestic supply of the televisions and thus, the producer surplus will fall. This means that the amount of imports will further increase. This can be illustrated as follows:

The world price was initially P1, where the consumer surplus was the area of A+B, producer surplus was the area of C+G and the total surplus was the area of A+B+C+G. The quantity of televisions imported is denoted by the Import₁ on the graph. When the world price falls to P2 (P1 - 100), the consumer surplus increases to the area of A+B+C+D+E+F, which means that the consumer surplus increases by the area of C+D+E+F. The producer surplus becomes the area of G only which means that the producer surplus declined by the area of C. Thus, the total surplus becomes the area of A+B+C+D+E+F+G which means that the total surplus in the economy increased by the area of D+E+F. As a result of the lower price, the domestic supply falls and the demand increases; this means that the imports increase to Import₂, as shown on the graph. The changes can be tabulated as follows:

	P1	P2	CHANGE
Consumer Surplus	A + B	A + B + C + D + E + F	C + D + E + F
Producer Surplus	C + G	G	–C
Total Surplus	A + B + C + G	A + B + C + D + E + F + G	D + E + F

Economics Concept Introduction

International trade: It is the trade relation between the countries.

Export: It is the process of selling domestic goods in the international market. Thus, the goods produced in the domestic firms will be sold to other foreign countries. So, it is the outflow of domestic goods and services to the foreign economy.

Import: It is the process of purchasing the foreign-made goods and services by the domestic country. Thus, it is the inflow of foreign goods and services to the domestic economy.

Comparative advantage: It is the ability of the country to produce the goods and services at lower opportunity costs than the other countries.

(b):

To determine

The impact of technological advancement on TV production due to fall in price.

Explanation of Solution

The area of C can be calculated as follows:

$\begin{array}{c}\text{Area of C}=\left[\left({\text{Quantity}}_1\times {\text{P}}_1-{\text{P}}_2\right)+\left(\frac{1}{2}\times \left(\begin{array}{l}{\text{Quantity}}_2\\ -{\text{Quantity}}_1\end{array}\right)\times {\text{P}}_1-{\text{P}}_2\right)\right]\\ =\left[\left(200,000\times \left({\text{P}}_1-\left({\text{P}}_1-100\right)\right)\right)+\left(\frac{1}{2}\times \left(400,000-200,000\right)\times 100\right)\right]\\ =20,000,000+10,000,000\\ =30,000,000\end{array}$

Area of C is $30 million.

The area of D can be calculated as follows:

$\begin{array}{c}\text{Area of D}=\frac{1}{2}\times \left({\text{Quantity}}_2-{\text{Quantity}}_1\right)\times {\text{P}}_1-{\text{P}}_2\\ =\frac{1}{2}\times \left(4,000,000-200,000\right)\times \left({\text{P}}_1-\left({\text{P}}_1-100\right)\right)\\ =10,000,000\end{array}$

Area of D is $10 million.

The area of E can be calculated as follows:

$\begin{array}{c}\text{Area of E}=\left({\text{Quantity}}_3-{\text{Quantity}}_2\right)\times {\text{P}}_1-{\text{P}}_2\\ =\left(1,000,000-400,000\right)\left({\text{P}}_1-\left({\text{P}}_1-100\right)\right)\\ =600,000\times 100\\ =60,000,000\end{array}$

Area of E is $60 million.

The area of F can be calculated as follows:

$\begin{array}{c}\text{Area of F}=\left({\text{Quantity}}_4-{\text{Quantity}}_3\right)\times {\text{P}}_1-{\text{P}}_2\\ =\frac{1}{2}\times \left(1,200,000-1,000,000\right)\times \left({\text{P}}_1-\left({\text{P}}_1-100\right)\right)\\ =\frac{1}{2}\times 200,000\times 100\\ =10,000,000\end{array}$

Area of F is $10 million.

The change in the consumer surplus is by the area of C+D+E+F. Thus, the value of change in consumer surplus can be calculated as follows:

$\begin{array}{c}\text{Change in consumer surplus}=\text{Area C}+\text{Area D}+\text{Area E}+\text{Area F}\\ =30,000,000+10,000,000+60,000,000+10,000,000\\ =110,000,000\end{array}$

Thus, the value of change in consumer surplus is by $110 million.

The change in the producer surplus is by the area of - C.  Thus, the value of change in producer surplus is by $30 million.

The change in the total surplus is by the area of D+E+F. Thus, the value of change in total surplus can be calculated as follows:

$\begin{array}{c}\text{Change in total surplus}=\text{Area D}+\text{Area E}+\text{Area F}\\ =10,000,000+60,000,000+10,000,000\\ =80,000,000\end{array}$

Thus, the value of change in total surplus is by $80 million.

Economics Concept Introduction

International trade: It is the trade relation between the countries.

Export: It is the process of selling domestic goods in the international market. Thus, the goods produced in the domestic firms will be sold to other foreign countries. So, it is the outflow of domestic goods and services to the foreign economy.

Import: It is the process of purchasing the foreign-made goods and services by the domestic country. Thus, it is the inflow of foreign goods and services to the domestic economy.

Comparative advantage: It is the ability of the country to produce the goods and services at lower opportunity costs than the other countries.

(c):

To determine

The impact of technological advancement on TV production due to tariff.

Explanation of Solution

When the government imposes a tax of $100 on the imports, the price of the imports will increase by $100; this means that the price level will revert back to the initial world price. This denotes that the consumer surplus, producer surplus, and the total surplus will revert back to the initial levels. The consumer surplus will fall by the area of C+D+E+F, which is $110 million and the producer surplus will increase by the area of C, which is $30 million.

The government would earn a tax revenue through this and the tax revenue can be calculated as follows:

$\begin{array}{c}\text{Tax revenue}=\left(\text{Domestic demand}-\text{Domestic supply}\right)\times \text{Tax amount}\\ =\left(1,000,000-400,000\right)\times 100\\ =600,000\times 100\\ =60,000,000\end{array}$

Thus, the government will earn a tax revenue of $60 million.

There will be deadweight loss in the economy by the area of D and F, which is $20 millions. This shows that the total surplus falls more than the increase in the producer surplus and the government revenue which means that from the welfare point of view, this policy is not good. The domestic producers would earn higher profits than before, which means that they will be happier with the decision of the government.

Economics Concept Introduction

International trade: It is the trade relation between the countries.

Export: It is the process of selling domestic goods in the international market. Thus, the goods produced in the domestic firms will be sold to other foreign countries. So, it is the outflow of domestic goods and services to the foreign economy.

Import: It is the process of purchasing the foreign-made goods and services by the domestic country. Thus, it is the inflow of foreign goods and services to the domestic economy.

Comparative advantage: It is the ability of the country to produce the goods and services at lower opportunity costs than the other countries.

(d):

To determine

The impact of technological advancement on TV production due to subsidy.

Explanation of Solution

The fall in the world price benefits the consumers because they are able to get the commodity at lower price than before. Also, the consumer surplus increases by $110 million. The fall in the world price harms the domestic producers because it leads to a fall in the producer surplus by $30 million. Since the consumer is benefited much more than the producer is harmed, the total welfare of the economy increases. Thus, the reason behind the fall in the world price does not matter in the analysis.

Economics Concept Introduction

International trade: It is the trade relation between the countries.

Export: It is the process of selling domestic goods in the international market. Thus, the goods produced in the domestic firms will be sold to other foreign countries. So, it is the outflow of domestic goods and services to the foreign economy.

Import: It is the process of purchasing the foreign-made goods and services by the domestic country. Thus, it is the inflow of foreign goods and services to the domestic economy.

Comparative advantage: It is the ability of the country to produce the goods and services at lower opportunity costs than the other countries.