In a small country, there is a single firm producing good X. The local demand cu
ID: 1245463 • Letter: I
Question
In a small country, there is a single firm producing good X. The local demand curve is given by P=100-Q. The firm's marginal cost curve is MC=2Q. The world price of good X is Pw=30. a) In free trade, what will be the domestic production of good X, how many units will be consumed and how many units will be imported? b) Suppose the government introduces a tariff t=10. Find new domestic production and consumption of the good. How many units will the country import? c) What would be a tariff-equivalent quantitative restriction? d) If a tariff-equivalent quota was used, would the resulting domestic price be higher, lower, or the same as under the tariff, why? e) Will the monopolist profits be higher under a tariff or under a tariff-equivalent quota? Explain.Explanation / Answer
world price is 30 hence local price should be same. hence 30=100-Q hence Q =70 hence b)tarrif increases price to 40 hence 40=100-Q hence Q=60