Microeconomics Project 2

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Submitted By billiebean
Words 654
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Part I
A. The US does not have a comparative advantage in wingdings because the world price is below their equilibrium domestic price of $10. It is cheaper to import wingdings than it is to produce them. If the US had a comparative advantage in wingdings, we would export them. Comparative advantage is that the countries with a comparative advantage in a certain good will specialize in and export that good.
B. The tariff decreases the import from 20 at the world price to 6 after the tariff. The price increases from $6 to $8 for someone to buy a wingding in the US, which means the quantity demanded domestically is now 18 and the quantity supplied domestically is 12, which is only a shortage of 6 units that needs to be supplied.
C. The tariff decreased consumer surplus by the area with height 8-6 and base y = 26 and base z= 18. The area of this can be calculated by splitting the area into a rectangle and a triangle. The rectangle has an area of (8-6)x18=36 and the triangle has an area of (1/2)x(26-18)x2=8. Adding the two the consumer surplus went down by 44.
D. Producer surplus increased after the tariff, by the area with height 8-6 and base y=6 and base z=12. The area of a trapezoid is just [(b1+b2)/2]xh, which is [(6+12)/2]x(8-6)=[18/2]x2=18. The producer surplus goes up by 18.
E. The tariff will lead to deadweight loss, which means that total welfare will be smaller than it was before the tariff. This is because the consumer surplus went down by 44, and 18 of that went to the producers. The tariff will generate revenue for the government, which is just $2 tariff per unit x 6 units to tariff, which is $12. Of the 44 units that the consumer lost, 18 went to the producers, 12 went to the government, which leaves 14 units unaccounted for, which is the deadweight loss.
Part II
Free trade is a trade policy that allows traders to transact business without…...

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