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##### Consider a small country in which the demand and supply curves

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solution

**Question**

Consider a small country in which the demand and supply curves of a particular commodity are respectively given as;(1);(2);where is the quantity demanded, the quantity supplied and the price.;(a) compute the equilibrium price and quantity under conditions of autarky, the elastictities of demand () and supply () at the point of equilibrium, consumers? surplus (CS), producers? surplus (PS) and total welfare (TW).;(b) Suppose now that the country decides to engage in free trade for this particular commodity and the international price. Compute,, imports (M),,, CS, PS, and TW. Compare your results to the case of autarky.;(c) Let us assume that the country imposes a tariff. Compute,, M,,, CS, PS, TW and tariff revenue (TR). Discuss your answer and compare the results with the case of free trade analyzed in (b).;(d) Now suppose that the country keeps the imposed tariff but because of technical change in the production of the commodity is able to produce 50% more output for any given price. This rotates the supply curve to the right and increases accordingly its slope. Compute,, M,,, CS, PS, TW and TR. Discuss your answer and compare the results with those in (b) and (c).;(e) Now suppose that instead the country faces a serious of strikes that makes firms to under-utilize their capacity and in particular, to be able to produce only 50% of the potential output for any given price. This is going to rotate the supply curve to left by decreasing its slope. Compute,, M,,, CS, PS, TW and TR. Discuss your answer and compare the results with the previous cases of technical change.;(f) Suppose now that in the presence of the tariff the country faces a decrease in demand because of changes in consumers? preferences for this particular commodity or perhaps because of a reduction in disposable income. This is assumed to shift the demand inwards in a parallel fashion at a rate of 33.5%. Compute,, M,,, CS, PS, TW and TR. Discuss your answer and compare the results with those of the case of technical change.

Paper#30600 | Written in 18-Jul-2015

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