Wednesday, April 15, 2015

2012 Microeconomics Exam FRQ #3

2012 Microeconomics Exam FRQ #3

(a) at the world price of $2 per pound, how much sugar is imported?

Ok, at $2 price 14m pounds is demanded (look at the demand curve),,, and at $2 then 2m pounds is supplied (look at supply curve).

Answer - One point is earned for stating that Loriland is importing 12 million pounds.

(b) Suppose that Lorillard imposes a per unit tariff on sugar imports and the new domestic price including the tariff is $4.

(i) Identify the new level of domestic production.

 Answer - One point is earned for identifying the new level of domestic production as 6 million pounds. 

(ii) Calculate the domestic consumer surplus for Lorillard. Show your work..

Answer - One point is earned for calculating the domestic consumer surplus as $25 million and showing the work: 1⁄2 [($9 - $4) × 10] = $25 

(iii) Calculate the total tariff revenue collected by the government. Show your work.

Answer - One point is earned for calculating the revenue from the tariff as $8 million and showing the work: ($4 - $2) (10 - 6) = $8. 

(c) Given the world price of $2, what per-unit tariff maximises the sum of domestic consumer surplus and producer surplus?

Consumer surplus is maxed with no tariffs,,, and producer surplus is maxed when all the international producers are able to sell in the country (without a tariff).

Answer - One point is earned for identifying the per-unit tariff that maximizes the sum of consumer and
producer surplus as $0. 


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