The domestic supply and demand functions for a good traded on a perfectly competitive market are:
Qd = 500 - P and Qs = 200 + 4P
(i) What is the equilibrium price and quantity on this market?
(ii) Assume that a foreign supplier exports a comparable good and is willing to sell all that domestic consumers want to purchase at a unit price of $40. What is the new equilibrium price and quantity on the market and how many units of the good will be imported?
(iii) Now suppose that a tariff of $10 per unit is imposed on the imports. What is the new equilibrium price and quantity, how many units will be imported, how much revenue will be generated by the tariff, and how much revenue will the foreign firms receive?
(iv) Now suppose that, instead of a tariff, the foreign firms agree to a voluntary export quota. Assume that the quota results in the same equilibrium quantity as the $10 tariff. How many units will be imported and how much revenue will the foreign firms receive?
Correct Answer:
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(ii) P = 40 and Q...
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