(i) How many videos does Spencer rent each year? How much consumer's surplus does Spencer receive from renting videos? (ii) Blockpopper's starts a "frequent viewers" club. For a membership fee of $35 per year, club members can rent as many videos as they wish at the discounted price of $2 per rental. Should Spencer join the "frequent viewers" club? If yes, how much surplus value would Spencer receive as a club member? If no, what membership fee would Spencer be willing to pay to join the club?
(i) The accompanying diagram shows the effects of a tariff. Initially, the price is P0, domestic firms produce Q0 units, and Q1 - Q0 units are imported from foreign firms. When the tariff is imposed, the price increases to P0 + t.
How does the tariff affect consumers' surplus and producers' surplus? How much tariff revenue is collected by the government? Does imposing the tariff cause the country's social gain to rise or fall?
(ii) The situation in part i is known as the "small country" case-the country has no market power, so its tariff does not affect the world price P0. Now consider the "large country" case shown in the accompanying diagram-in this case, the country has market power, and the tariff (by reducing the demand for imports) causes the world price to fall from P0 to P1. So after the tariff is imposed, the domestic price is P1 + t.
How does the tariff affect consumers' surplus and producers' surplus in this situation? How much tariff revenue is collected by the government? When a "large country" imposes a tariff, will its social gain rise or fall?
(i) The tariff causes consumers' surplus to fall from area A + B + C + D + E + F to area A + B. Producers' surplus rises from area G to area C + G, and area E is collected in tariff revenue. Social gain falls by area D + F.
(ii) The tariff causes consumers' surplus to fall from area A + B + C + D + E + F to area A + B. Producers' surplus rises from area G + M to area C + G + M. Area E + J is collected in tariff revenue. In the large country case, social gain may either rise or fall; it will fall only if area D + F outweighs area J.
You might also like to view...
An argument against inflation targeting is that
a. the Fed does not completely control inflation. b. it rules out stabilization policy. c. puts too much emphasis on low inflation. d. All of the above
Without restrictions, the market supply curve is horizontal at P = 5, and the inverse demand curve for taxi cab rides is P = 20 - Q in a competitive market. Subsequently, only 10 taxi cabs are allowed in the market
This results in a deadweight loss of A) 0. B) 5.5. C) 12.5. D) 25.
A large aircraft manufacturer, like Boeing, may have a cost advantage over a new smaller manufacturer because of:
a. diseconomies of scale. b. economies of scale. c. diminishing returns to a fixed factor of production. d. the principal agent problem is generally less severe for larger firms.
When both the demand for a good increases and the supply of the good increases, the equilibrium quantity definitely increases
Indicate whether the statement is true or false