Assume that Canada is an importer of televisions and that there are no trade restrictions. Canadian consumers buy 1.2 million televisions per year, of which 600,000 are produced domestically and 600,000 are imported. The initial world price is $400.

a. [9 marks] Suppose that a technological advance among Japanese television manufacturers causes the world price to fall from $400 to $300. Draw a graph to show how this change affects the welfare of Canadian consumers and Canadian producers and how it affects total surplus in Canada. Label the diagram carefully to show all the areas using letters of alphabets. (Do not shade the areas).

b. [8 marks] After the fall in price, consumers buy 1.4 million televisions, of which 400,000 are produced domestically and 1 million are imported. Calculate the change (this will be only the area either gained or lost by consumers and producers) in consumer surplus, producer surplus and total surplus due to price reduction). Provide numerical answers by calculating the area. Also clearly show it on the diagram that you draw in part a) above.

c. [8 marks] If the government responded to fall in price by imposing a tariff of $100 on imported televisions, what would this do to the market? Show this on a new graph and calculate the government revenue that would be raised and the deadweight loss due to tariff. Would it be good policy from the standpoint of Canadian welfare? Who might support the policy (producers or consumers)? Give numerical answers.