International Trade Theory and Policy
by Steven M. Suranovic

Trade 100

Trade 100

Trade Problem Set 100 3-1

1. Suppose the U.S. market demand for VCRs is given by D = 1000 - 2P. The U.S. market is supplied by a foreign monopolist with a constant marginal cost of production equal to $200. The marginal revenue curve faced by the supplier is given by MR = 500 - Q.

A. Calculate the equilibrium price and quantity of imports of VCRs. Depict this equilibrium graphically.

B. Calculate consumer surplus in this market equilibrium.

Suppose the government imposes a specific tariff of $100.

C. Calculate the new equilibrium price and quantity.

D. Calculate the change in consumer surplus and the tariff revenue.

E. What is the change in national welfare?

F. What is the 1st-Best policy action to raise national welfare in this case? If this policy is applied what would be the domestic price and quantity imported?

G. Calculate the change in national welfare if the 1st-Best policy is applied rather than the tariff. Compare this with the national welfare effect of the tariff.

H. Briefly explain how to identify 1st-Best policies in general and explain why the policy in this case satifies the criterion.

International Trade Theory and Policy - Chapter 100: Last Updated on 1/07/08