ECON 201-2 Calculate the world equilibrium price, p. What are the quantities demanded in each market, QA* and QB*, and A’s imports?
1. Steel is produced in 2 countries, A and B. Their inverse demands and supplies
are given in the table below:
Country Inverse demand Inverse supply
A p = 150 – QA
d
p = 10 + 0.5QA
s
B p = 80 – QB
d
p = QB
s
(a) (5 points) Calculate the world equilibrium price, p. What are the quantities
demanded in each market, QA* and QB*, and A’s imports? Show your work!
(b) (10 points) Country A imposes a tariff of $10 per unit on the exports of B and
gives a $5 per-unit subsidy to A’s producers. Calculate the prices pA* and pB*
after the tariff, and the tariff revenue. Show your work and reasoning!
(c) (5 points) What is the combined incidence of the tax and subsidy on buyers
and sellers in the two countries? Write a number (positive, negative or zero) in
the 4 cells below to indicate the incidence per ton on each party. Show your work
and reasoning!
2. Pat and Tim are brothers who live in the little town of Boondock. Each earns a
weekly income of $24 which they can spend on beer (x) and food (y). The price of
food is $1 per unit. The price of beer is $1 per mug in Boondock but one can only
drink up to 12 mugs. In the city of Maxopolis, beer is 50 cents a mug and there is
no drinking restriction. However, traveling to and from Maxopolis takes time
and costs $9. Therefore, Pat and Tim can only spend their weekly income either
in Boondock or in Maxopolis; they cannot do both!
(a) Draw Pat’s (or Tim’s) budget constraint (they are identical)
DETAILED ASSIGNMENT
