Question
A small country currently imposes a 20% tariff on bicycle imports. The domestic demand is given by = 7500 5and domestic supply is given by
A small country currently imposes a 20% tariff on bicycle imports. The domestic demand is given by = 7500 5and domestic supply is given by = 10. The current world price is $300.
What is the prohibitive tariff? (A prohibitive tariff is one that is just high enough to eliminate all imports.)
Suppose that instead of the 20% tariff, the country's government wants to impose a quota. What is the tariff-equivalent quota?
Suppose that an increase in the price of gasoline increases the demand for bicycles to = 9000 5. With the new demand, is the quota you found in part b. still equivalent to the 20% tariff? If not, which policy produces the bigger deadweight loss given this new demand?
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