Kawmin is a small country that produces and consumesjelly beans. The world price of jelly beans is$1 per bag, and Kawmin’s domestic demand andsupply for jelly beans are governed by the followingequations:Demand: QD = 8 − PSupply: QS = P,where P is in dollars per bag and Q is in bags of jellybeans.a. Draw a well-labeled graph of the situation inKawminif the nation does not allow trade.Calculatethe following (recalling that the area ofa triangle is ½ × base × height): the equilibriumprice and quantity, consumer surplus, producersurplus, and total surplus.b. Kawmin then opens the market to trade. Drawanother graph to describe the new situation inthe jelly bean market. Calculate the equilibriumprice, quantities of consumption and production,imports, consumer surplus, producer surplus, andtotal surplus.c. After a while, the Czar of Kawmin respondsto the pleas of jelly bean producers by placinga $1 per bag tariff on jelly bean imports. On a graph, show the effects of this tariff. Calculatethe equilibrium price, quantities of consumptionand production, imports, consumer surplus,producer surplus, governmentrevenue, and totalsurplus.d. What are the gains from opening up trade?What are the deadweight losses from restrictingtrade with the tariff? Give numericalanswers.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Kawmin is a small country that produces and consumes
jelly beans. The world price of jelly beans is
$1 per bag, and Kawmin’s domestic demand and
supply for jelly beans are governed by the following
equations:
Demand: QD = 8 − P
Supply: QS = P,
where P is in dollars per bag and Q is in bags of jelly
beans.
a. Draw a well-labeled graph of the situation in
Kawmin
if the nation does not allow trade.
Calculate
the following (recalling that the area of
a triangle is ½ × base × height): the equilibrium
price and quantity, consumer surplus, producer
surplus, and total surplus.
b. Kawmin then opens the market to trade. Draw
another graph to describe the new situation in
the jelly bean market. Calculate the equilibrium
price, quantities of consumption and production,
imports, consumer surplus, producer surplus, and
total surplus.
c. After a while, the Czar of Kawmin responds
to the pleas of jelly bean producers by placing
a $1 per bag tariff on jelly bean imports. On a graph, show the effects of this tariff. Calculate
the equilibrium price, quantities of consumption
and production, imports, consumer surplus,
producer surplus, government
revenue, and total
surplus.
d. What are the gains from opening up trade?
What are the deadweight losses from restricting
trade with the tariff? Give numerical
answers.

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

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