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3. The US orange market is characterized by an upward sloping supply curve and a downward sloping demand curve. a. Draw a graph depicting the
3. The US orange market is characterized by an upward sloping supply curve and a downward sloping demand curve. a. Draw a graph depicting the equilibrium in this market without international trade. Assume that the equilibrium price is $4/Ib, and the equilibrium quantity is 2 million lbs. Label your no-trade equilibrium as point A. Suppose that the US orange market opens to trade, and that foreign orange growers are willing to supply an unlimited quantity at a price, Pw =$2/lb, below the US no-trade price. Label this equilibrium as point B, identifying the new equilibrium price and quantity. Determine the changes to consumer surplus domestic producer surplus, and government revenue. Consumer surplus increases because the world price is cheaper, domestic producer surplus decreases because they lose customers to importing, and government revenue does not change unless there is a ta riff. b. After opening up the US orange market to trade, a bunch of high-priced lobbyists push for a $.50/lb tariff on imported oranges. Assume that they are successful, and drawing a new graph, continue to label your free-trade equilibrium as point B (without the tariff), and label the post- tarriff equilibrium as point C. Which group hired the lobbyists, consumers or domestic producers of oranges? How does the amount of imported oranges, consumer surplus, and producer surplus change? Domestic producers hired the lobbyists because if consumers are buying the imported oranges, then they are not buying domestically produced oranges. A tariff increases the price of oranges and leads to less oranges being imported, and more oranges being sold domestically. This leads to a decrease in consumer surplus and an increase in produced surplus
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