Midterm 2 Practice Solutions University of Mississippi Econ 202 Dr David Fragoso Gonzalez A Without a tax the equilibrium quantity in this market is 40 while the price paid by consumers is 600 Consumer surplus is 8000 and producer surplus is 12000 If a 500 tax is levied in this market the equilibrium quantity drops to 20 Consumers pay a price of 800 and the burden imposed on them by the tax is 200 The burden of the tax on sellers is 300 Consumer surplus is 2000 producer surplus is 3000 and the welfare loss sustained by society due to the tax is 5000 Government revenue from the tax is 10000 Explanation Without tax With tax B Let the equilibrium quantity without trade be 5 tons Without trade the total surplus generated in this society is 25 Now suppose that Genovia opens its tuna market to trade without restrictions Then Genovia imports exports imports a total of 6 tons of tuna Consumer surplus is then 32 while producer surplus is 2 The country experiences a gain from trade of 9 A few months after opening itself to trade and under pressure from some lobbies Genovia passes a 1 5 tariff per ton of tuna As a consequence quantity demanded decreases increases decreases by 1 5 while quantity supplied increases by 1 5 Government revenue from the tariff is equal to 4 5 The tariff creates a DWL of 2 25 Explanation If a similar question comes up in Monday s test the axis will be precisely labeled Here you had to figure out that if a price or quantity falls between two numbers the number you are looking for is the middle number Without trade or TS A C G With trade or CS A B C D E F or PS G Gains from Trade TS with trade TS without trade 34 25 9 or gains B D E F With tariff Government revenue 1 5 6 5 3 5 4 5 or Govt rev E DWL D F or C Left alone the market will produce Q1 concerts at a price of P1 The market s decision does not take into account the external cost of mathematical expression P1 P0 created by each concert Consumer surplus with the market equilibrium corresponds to the area a b c d while producer surplus corresponds to area e f The total external cost supported by the neighbors of the venues is mathematical expression P1 P0 Q1 The socially optimal quantity of concerts is Q0 The price at which quantity demanded would be equal to that optimal amount is P2 If the government limited by law the quantity of concerts to its optimal amount consumer surplus would be given by area a and producer surplus would be given by area b c e The total external cost supported by the neighbors would be mathematical expression P1 P0 Q0 D Domestic producers lobbying against trade which means in favor of restrictions are usually asking for restrictions on imported goods competing with their own products Their motive is the protection of domestic producer surplus in their industry Lobbies also include worker organizations who are concerned about the prospect of their members losing their jobs The main arguments used by domestic producers and workers threatened by imports vary from industry to industry and from country to country They include the job argument that jobs will be lost if the country opens itself to trade the national security argument and the unfair competition argument You may also mention other arguments seen in class like the trade as a bargaining chip argument or the infant industry argument but these are likelier to be brought up as a matter of policy 25 B 7 C 8 C 9 B 10 D 11 C 12 A 13 A 14 B 15 D 16 C 17 B 18 C 19 C 20 B 21 B 22 A 23 C 24 B 1 D 2 C 3 C 4 A 5 D 6 A