QUESTION
Intermediate Microeconomics
Intermediate Microeconomics Assignment 2 Due date: Friday, December 4, 2020, at the beginning of the class. Assignments submitted after my solution is posted will not be accepted (not even if they are posted a second after I post my solutions!) Each question is worth 3 points. Your answer has to be typed, and your diagrams should be drawn using a software package. I will not mark any hand-written assignments. Your final submission has to be ONE (only one!) PDF file. Identical assignments are subject to 50% penalty. Instead of submitting identical assignments you should submit a team answer. If you submit a team assignment write the names and student numbers of the other team members in the comment section of the submission box. The domestic supply and demand for lumber meet at a price of PA in Rivendell. The world price for lumber is PW. When trade opens up, Rivendell becomes an exporter of lumber. In the lumber market, Rivendell is a small open economy. 1. In the same diagram, illustrate the lumber market equilibrium in Rivendell, before and after trade opens. 2. In the above diagram illustrate the gains/losses for all relevant groups of Rivendellians, and the deadweight loss. 3. The Lord of Rivendell, decides to help domestic producers by offering them a subsidy of s Jingle Bills for each unit of lumber produced. In a new diagram illustrate the gains/losses for all relevant groups of Rivendellians, and the deadweight loss. 4. Instead of a subsidy, Elrond decides to impose a tax of t Jingle Bills on each unit of lumber produced domestically. In a new diagram illustrate the gains/losses for all relevant groups of Rivendellians, and the deadweight loss. 5. Could a subsidy or a tax improve the well-being of Rivendellians as measured by the total surplus/social gain? Use your answers from questions 3 and 4 to justify your answer. If your answer is yes, what is the intuition behind your answer (answer without using any diagram.) 6. Bonus (1 point only) What is the three-letter-word describing a Rivendellian? Rivendell is the major producer of Super Duper Legolas Bows (SDLBs) in the world. That is, in the market for SDLBs, Rivendell is a large open economy: the world price of SDLBs depends on how many bows are produced and sold by Rivendell. When trade opens, Rivendell increases its production of SDLB, becomes an exporter of SDLB, and the world price of SDLB decreases. 7. In a diagram illustrate the gains/losses for all relevant groups of Rivendellians, and the deadweight loss in autarky. (Autarky is the situation in which Rivendell does not engage in any trade with the rest of the world). 8. The Lord of Rivendell, decides to help domestic producers by offering them a subsidy of s Jingle Bills for each SDLB produced. In a new diagram illustrate the gains/losses for all relevant groups of Rivendellians, and the deadweight loss. 9. Instead of a subsidy, Elrond decides to impose a tax of t Jingle Bills on each SDLB produced domestically. In a new diagram illustrate the gains/losses for all relevant groups of Rivendellians, and the deadweight loss. 10. Could a subsidy or a tax improve the well-being of Rivendellians as measured by the total surplus/social gain? Use your answers from questions 8 and 9 to justify your answer. If your answer is yes, what is the intuition behind your answer (answer without using any diagram.)?
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Atrt ans design
| Subject | Economics | Pages | 5 | Style | APA |
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Answer
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Question one
Considering that revenue is a small country
PA will be the price in Rivendell
PW will be the global price
Q1 Q2 are exports
OQ1 = domestic consumption
Consumer surplus = Area AE (PW)
Producer surplus = Area (PW) FG
There is no dead weight loss
Equilibrium with trade
Question 2
Consumers surplus after trade = a
Producer surplus after trade = b + c + d + e + f
Consumer surplus before trade = a + b + c
Producer surplus before trade = e + f
Change in CS = - (B + C)
Change in PS = - b +c + d
There is no dead weight loss
Overall change in welfare = b + c + d – (b +c) = d
Question three
The lord of Rivendell has given a subsidiary
An increase in prices decreases consumer surplus by (a + b)
As a result producer surplus increases by (a + b +c)
Subsidiary cost = - (b + c + d)
Change in CS = - (a + b)
Lord Rivendell cost = - (b + c + d)
Hence deadweight loss = a +b + c – (a + b) – (b + d + c) = - (b + d)
Question 4
The lord of Rivendell imposes taxes
Change in consumer surplus = a
Change in producer surplus = - (a + b + c +a)
Revenue = c
Dead weight loss = a – (a + b + c + d) + c = - (b + d)
Question 5
A tax or subsidiary will not improve the well-being of Rivendellians since both create a dead weight loss which will result in a decrease in welfare.
Question 6
Cut
Question 7
Given that Rivendell is a large scale producer of SOLBS globally, when it increases its production the prices for SOLBS decreases globally.
P0= Equilibrium price
G0 = Equilibrium quantity
At PW there is increase in consumer surplus and a decrease in producer surplus
There will be no dead loss since its cost created due to market inefficiencies such as subsidies
Question 8
The Lord of Rivendell introduces a subsidy s
By Imposing a subsidy Ps results in an increase in quantity demanded Q
The subsidy increases consumer surplus ADE to AGJ to produce producer surplus from KDE to KGH
Government revenue = LMEF
Dead weight is shown by the shaded parts
Question 9
The Lord of Rivendell decides to impose tax t
Pw = world price
Pt = price after tax
Imposing tax results in a decrease in the quantity demanded which results in consumer surplus falling from PwHA to PtDA and Producer surplus increases from PwGH to PtCH
Deadweight is shown by the shaded region
Question 10
A subsidiary or tax improve will not improve the wellbeing of Rivendellians because it can either result in a decrease in consumer surplus or a decrease in consumer surplus. It also results in an increase in deadweight cost that is met by the society