CONSUMER LOSSES IN MEXICO

QUESTION

In this case we can find the value of P and Q by the concept MC=MR

Given: P=100-2Q

Therefore PQ=100Q-2Q²

Therefore TR=100Q-2Q² (TR is the total revenue)

MR=100-4Q———————I (differentiating above wrt Q)

Given

C=5Q+0.5Q²

MC=5+1Q———————–ii     (differentiating above wrt Q)

MR=MC

SOLUTION

100-4Q=5=1Q

5Q=95,Q=19

Substituting Q=19 in P=100-2Q, we get P=100-2*19=100-38=62

Hence if the firm sells only in the domestic market, it can sell 19 units at a price of 62 each

1 b

Ans. If the firm sells both in domestic and Russian markets, then

MC=MR in the Russian market=P in Russian market

Therefore 5+1Q=32, Q=27, this is the total output

Now to see how much of this total output is sold in domestic and how much in foreign market, we apply:

MR in domestic market=MR in international market=MC=P in international market

100-4Q_dom=32, 4Q_dom=68 ,Q_dom=17 units. P_dom=100-2Q_dom=100-2*17=100-34=66.

1 c

Ans.  Since total output=27, and units sold in domestic market is 17, therefore units sold in Russian market=27-17=10.

1 d.

In the diagram the P_for line is the MR_For line, where MC line intersects this line, that is the level of total

Output, which here is 27 units. Part of the total output is exported and part of it is sold in the

domestic market.

The point where MR line intersects P_for line is the level of domestic sales, which here is 16.

At this point the domestic sale corresponds to the domestic demand.

Hence exports=Total output-domestic sales=27-16=11 units

Due to dumping the prices in the domestic market also increases; the welfare effect is measured by

the effect  on consumer, due to increase in domestic price, the domestic consumer looses, hence

the welfare effect is negative.

2

Ans.See diagram2.

Diagramatic Expression of Imports and imposition of Tariff:

In order to represent diagrammatically the situation of imports and effects of imposition of tariff, consider a product being imported because of its price advantage, and ignore other aspects, that is the imported product is cheaper to the consumer than the same product available in the country, and demand and supply functions are totally based on price.

In this case US is the importing country and Mexico is the exporting country and the product is Avocado.

What is the maximum price beyond which the price of imported product cannot rise? This is the price where the demand curve and supply curve intersect, that is at this price the demand and supply are equal, above this point the supply exceeds the demand. Import can take place when the demand exceeds the supply and the price of imported product cannot exceed the price where demand and supply become equal.

Suppose a country imports a product at price Po.

The Government can impose tariff for making revenue or to promote domestic producers (Dwivedi,2009). If the Government of the importing country now introduces a tariff on the imports, three situations can arise

The importer absorbs the entire tariff and continues to make available the product at Po to the consumers of the importing country. In this case the Government earns from the tariff paid by foreign seller per unit product sales. The loss of the foreign producer can be estimated by considering P_o-P₁, as in this case the foreign producer sells at a lower price the remaining component of the price Po is the tariff, the producer sells at lower price but does not create more demand, as the price to the consumer does not change, hence this becomes the loss for the foreign producer/supplier.

The foreign producer passes the entire burden of tariff on the consumers of the importing country, in this case the price of the product will rise to P₂.Demand for the product will decrease and its supply from foreign producer will also decrease. Domestic producers will now gain as they will not be forced to sell at price Po.

The foreign producer can decide to take part of the tariff burden and pass the rest to the consumer.

Hence from above we can see that the price, after introduction of tariff will range between P₂ and P₁, the difference between P₂ and P₁ is the tariff on imports introduced by the Government.

Due to imposition of tariff on imports, the demand decreases but the supply increases. This decrease in demand and increase in supply due to imposition of tariff gives rise to efficiency loss.

3a

Ans. In domestic equilibrium Quantity demanded=Quantity supplied

Therefore,Q_s=Q_D,100+40P=400-10P, 50P=300,P=$6

Equilibrium quantity=100+40*6=340 units

Equilibrium Price=$6

Imports=Quantity demanded-Quantity Supplied=Q_D-Qs=400-10P-(100+40P)=400-10P-100-40P

=300-50P, given P=$4, therefore Quantity imported=300-50*4=300-200=100 units.

3b

Ans. Because here the US is a small country, imposition of tariff will have no effect on the international prices of avocados, but in USA, the export price will increase by $1 of the world price that is it will become equal to $5.

Level of imports after tariff=Quantity demanded after tariff-Quantity supplied after tariff=400-10P-100-40P=300-50P,here P=$5,therefore Import Quantity=300-50*5=50 units.

Since here the US is a small country, the imposition of tariff will have no effect on world prices but level of imports will decrease and welfare effect will be negative.

Welfare loss

Welfare loss is also called efficiency loss, it is depicted in the diagram as below.

(Pl ignore the text in the diagram)

(Welker.J, 2012)

The green shaded triangle areas are the welfare loss. Here P_t is $5, and P_w is $4 and P_d is $6

Welfare loss=Area of triangle Y+ Area of triangle X=1/2 Pt-Pw [(Q₂-Q₁)+(Q3-Q4f)]

=1/2*1[40+10] =1/2*1*50=$25.

(Using the demand and supply relations, given in the question).

4

Ans. The World Trade Organization promotes free trade regime. Though it does not recommend removing all subsidies, quotas/tariffs etc, it may ask member countries to reduce the same so as to make it comparable to world standards and only apply such measures to rectify market imperfections.

As per WTO China was required to limit subsidies to 8.5% of the value of farm output and remove export subsidies on agricultural exports, in order to promote level playing trade with their global counterparts.

The continuance of such subsidies was found to favor the domestic producers of China, as the subsidies were helping them to keep the prices of their produce low, by the reduction and removal of subsidies, the domestic players would have to compete with global players, and the customer would prefer to buy from the supplier(s) from which they can source the products at the lowest price, thereby the market would become competitive and both domestic and global players will be able to compete on the same level.

Reference

Dwivedi,D.N.,2009.Managerial Economics.7E.New Delhi:Vikas Publishing House Pvt. Ltd.

Welker.J, 2012.Economic Impacts of Tariff. Available at: http://welkerswikinomics.com/blog/2007/10/17/ib-graphing-and-understanding-the-economic-impacts-of-protectionism/. Accessed[May 30,2012].

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