econ questions, DUE IN 17 hours

total 7 questions, and it due in 17 hours

1. Consider a market in a closed economy. Suppose that its supply function is S = –10 + 2p
while its demand function is D = 290 – p, where p is the market price.
(a) Derive the export supply function of the market.
(b) Making use of the export supply function, determine the autarkic price. What are the
quantities of supply and demand?

2. Figure 1.4 (in Section 1.5) illustrates the case of an importable, and it shows that the
economy gains from trade. Consider now an exportable under a policy of free trade. (You
can assume that the market is facing a given world price of the commodity higher than its
autarkic price. The economy is then an exporter of the good.)

(a) Draw a diagram of the market, showing the supply curve, demand curve, and the autarkic
equilibrium. (In this case, the world price is greater than the autarkic price.)
(b) Explain how free trade may affect the consumption, production, and price of the local
economy.
(c) Defining the welfare of the market as the sum of consumers surplus and producers surplus,
explain how free trade may affect the welfare of the market. (d) Make sure that you indicate in
your diagram the production gain and consumption gain.
(e) If you are able to show that the present economy gains from trade, you can then conclude
that free trade may benefit both the importing country and the exporting country. Based on this
result, can you explain why trade is regarded as a positive-sum game?

3. Consider again the market in question 1. Suppose now that the economy is facing a world
market with a given price of the commodity equal to p* = 50. Allowing free trade is now being
considered by the local government.

(a) Determine the consumers surplus, producers surplus, and welfare of the market under
autarky.

(b) Explain how free trade may affect the consumption, production, and price of the local
economy. Is the economy importing or exporting the commodity?

(c) Determine the welfare of the market under free trade. Is the market gaining from trade? (d)
Determine the consumption gain and the production gain.

4. Consider again the market in question 3. Suppose now that the government allows import of
the commodity, but importers have to pay a tariff of 20% of the prevailing world price.

• (a) Determine the new local price, production, and consumption of the good in the local
market. What is the level of import?

• (b) Determine the consumers surplus, producers surplus, tariff revenue, and welfare of
the market under the restricted trade. Is the tariff hurting or benefiting the market?

• (c) Determine the production cost and consumption cost of the tariff.

5. Consider a market of a commodity, with a demand given by D = 250 – p, where p is the
market price.

(a) Suppose that there is a single supplier, producing the commodity with a marginal cost of MC
= 10 and a fixed cost = 10. Determine the profit-maximizing output of the firm. Determine also
the equilibrium price, consumers surplus, and the profit of the firm.

(b) Suppose that there are actually two firms supplying to the market. The first firm, called firm
A, is described in part (a). The second firm, called Firm B, has the same technology as firm A.
Determine the optimal outputs of the firms, the market price, the consumers surplus, and the
profits of the firms.
(c) Making use of your results in (a) and (b), answer the following questions: (i) If firm A is the
only firm in the market initially, how would the addition of a second, identical firm affect the
market price, consumers’ surplus, profit of the firm, and the welfare. (ii) Should the government
encourage more firms to enter the market? Why? (iii) How would firm A like the entrance of
additional firms supplying similar products to the market?

6. Consider two countries labelled A and B, in each of which there is a firm and a market for
the commodity. The markets are segmented. The demand for the commodity in market A
is D = 250 – p. Firm A has a marginal cost of MC = 10 and a fixed cost = 10. The demand
for the commodity in market B is D* = 300 – 2p*. Firm B has the same technology as
firm A’s. Free Trade with zero transport cost are allowed. Determine the optimal outputs
of the firms, the market prices and the consumers surpluses in the two countries. What are
the export and import of the commodity of each of the countries?

7. Consider again the two-country model in question 6. Suppose now that country A
imposes a specific tariff of 5 per unit while country B maintains a free-trade policy. Write
down the profit functions of the firms. Using these profit functions, determine the
equilibriua in the two markets and the volumes of import and export of country A. How
are the welfare of the countries be affected by A’s tariff?