Subpart (a):
The equilibrium price and the quantity of haircuts and total surplus.
Subpart (a):
Explanation of Solution
Supply curve: The supply equation is
In Figure 1, horizontal axis measures quantity and vertical axis measures price. The curve D indicates demand and the curve S indicates supply. Market reaches the equilibrium at point ‘e’ where the demand curve intersects with supply curve.
Equilibrium price can be calculated as follows.
Equilibrium price is $4.
Thus, equilibrium quantity is 4 units.
Consumer surplus is $8.
Producer surplus is $8.
Total surplus can be calculated as follows.
Total surplus is $16.
Concept introduction:
Consumer surplus: It is the difference between the highest willing price of the consumer and the actual price that the consumer pays.
Producer surplus: It is the difference between the minimum accepted price for the producer and the actual price received by the producer.
Equilibrium price: It is the market price determined by equating the supply to the demand. At this equilibrium point, the supply will be equal to the demand and there will be no excess demand or
Subpart (b):
The equilibrium price and the quantity of haircuts and total surplus.
Subpart (b):
Explanation of Solution
The world price for the good is $1. Thus, when the country opens the market for trade, the price becomes $1 in domestic country too. Figure 2 describe this situation.
In Figure 2, horizontal axis measures quantity and vertical axis measures price. The curve D indicates demand and the curve S indicates supply. Market reaches the equilibrium at point ‘e’ where the demand curve intersects with supply curve.
When the competitor (Rest of the world) sells a good at price $1, in domestic country equilibrium price become equal to world price. Thus, equilibrium price in the domestic country is $1.
Equilibrium domestic supply can be calculated by substituting the domestic equilibrium price in to supply equation.
Thus, equilibrium quantity is 1 unit.
Equilibrium domestic demand can be calculated by substituting the domestic equilibrium price in to demand equation.
Thus, equilibrium domestic demand is 7 units.
Total imports can be calculated as follows.
Domestic imports are 6 units.
Consumer surplus can be calculated as follows.
Consumer surplus is $24.5.
Producer surplus can be calculated as follows.
Producer surplus is $0.5.
Total surplus can be calculated as follows.
Total surplus is $25.
Concept introduction:
Consumer surplus: It is the difference between the highest willing price of the consumer and the actual price that the consumer pays.
Producer surplus: It is the difference between the minimum accepted price for the producer and the actual price received by the producer.
Equilibrium price: It is the market price determined by equating the supply to the demand. At this equilibrium point, the supply will be equal to the demand and there will be no excess demand or excess supply in an economy. Thus, the economy will be at equilibrium.
Subpar (c):
The equilibrium price and the quantity of haircuts and total surplus.
Subpar (c):
Explanation of Solution
When domestic country impose tariff of $1, the price in domestic country increases from $1 to $2. This increase in price is shown in the Figure 3.
In Figure 3, horizontal axis measures quantity and vertical axis measures price. The curve D indicates demand and the curve S indicates supply. Market reaches the equilibrium at point ‘e’ where the demand curve intersects with supply curve. Price is increases from $1 to $2 due to the tariff of $1.
Domestic equilibrium price can be calculated as follows.
New domestic price is $2.
Equilibrium domestic supply can be calculated by substituting the domestic equilibrium price in to supply equation.
Thus, equilibrium quantity is 2 units.
Equilibrium domestic demand can be calculated by substituting the domestic equilibrium price in to demand equation.
Thus, equilibrium domestic demand is 6 units.
Total imports can be calculated as follows.
Domestic imports are 4 units.
Consumer surplus can be calculated as follows.
Consumer surplus is $18.
Producer surplus can be calculated as follows.
Producer surplus is $2.
Government revenue can be calculated as follows.
Government revenue is 4.
Total surplus can be calculated as follows.
Total surplus is $24.
Concept introduction:
Consumer surplus: It is the difference between the highest willing price of the consumer and the actual price that the consumer pays.
Producer surplus: It is the difference between the minimum accepted price for the producer and the actual price received by the producer.
Equilibrium price: It is the market price determined by equating the supply to the demand. At this equilibrium point, the supply will be equal to the demand and there will be no excess demand or excess supply in an economy. Thus, the economy will be at equilibrium.
Subpart (d):
Calculate total gains and deadweight loss.
Subpart (d):
Explanation of Solution
Total gains from opening up trade can be calculated as follows.
Total gains are$8.
Deadweight loss can be calculated as follows.
Deadweight loss is $1.
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Chapter 9 Solutions
EBK STUDY GUIDE FOR MANKIW'S PRINCIPLES
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