Suppose that in a competitive market, the supply function is given by $S(p) = 5000(p-2)$ and the demand function is given by $D(p) = 2000(16-p)$. Suppose still, that in order to recompose its' budget balance, the government decides to tribute the industry with a $\\\$0.70/\text{ unit produced}$ tax. Answer:

c) Now suppose the government decides to open this sector to external competition, keep the domestic tax on production. The international price is $4$. What will the new domestic supply be? What will the imported volume be? What will be the industry gain (increase in profit) if the government, keeping the economy open, decides to remove the tax?

Any tips are appreciated.

EDIT: I think I got it:

For a price of $\\\$4$, the domestic supply and demand are (in this case the price the producers receive per unit is $\\\$4-0.7$ due to the tax): $$ \boxed{Q^D = 2000 \cdot (16-4) = 24000}, \quad \boxed{Q^S = 5000 \cdot [ (4-0,70)-2]= 6500} $$ And, therefore, the imported volume is: $$ \boxed{I = 17500} $$ In the absence of the tax, we have: $$ Q^D = 2000 \cdot (16-4) = 24000, \quad Q^S = 5000 \cdot (4-2) = 10000 $$ and thus the industry gain is $10000 \cdot 4 - 6500 \cdot (4-0.7) = \boxed{\\\$18550}$.

Is it correct?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.