   Chapter 9, Problem 8PA

Chapter
Section
Textbook Problem

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 – PSupply: 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.

Subpart (a):

To determine
The equilibrium price and the quantity of haircuts and total surplus.

Explanation

Demand curve: The demand equation is QD=8p indicates that the consumer maximum willing price is $8 (When quantity is zero) and their maximum willing to buy the good is 8 units (when the price is zero). Connecting these points ((8, 0) and (0, 8)) gives demand curve. Supply curve: The supply equation is QS=p indicates that producer minimum willing price is zero (When quantity is zero) and producer willing to sell 1 unit for increasing price by 1 unit. Thus, draw extent the line from these points ((0, 0) and (1, 1)) would give supply curve. The market equilibrium is drawn based on the above information as mentioned in Figure 1. In Figure 1, horizontal axis measures quantity and vertical axis measures price. The curve D indicates demand and the curve S indicates supply. Market reaches the equilibrium at point ‘e’ where the demand curve intersects with supply curve. Equilibrium price can be calculated as follows. Demand=Supply8p=p2p=8p=82=4 Equilibrium price is$4.

Equilibrium quantity can be calculated by substituting the equilibrium price in to supply equation.

Q=p=4

Thus, equilibrium quantity is 4 units

Subpart (b):

To determine
The equilibrium price and the quantity of haircuts and total surplus.

Subpar (c):

To determine
The equilibrium price and the quantity of haircuts and total surplus.

Subpart (d):

To determine
Calculate total gains and deadweight loss.

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