Consider that all e-book readers or e-readers are identical goods, and that the market is competitive. The demand for e-readers users in the US is given by Q = 12 - P and the supply by US manufacturers is given by Q = P - 3. Price, P, is measured in hundreds of dollars and quantities, Q, is measured in millions. The US market for e-readers is large enough such that it can influence world price. The export supply curve of foreign manufacturers selling into US is given as Q = 2P - 1.

1a. What would be the price of a e-reader in the US if imports were banned? [3 marks]

1b. If e-readers can be imported freely into the US:

i. What is the equilibrium price of e-readers in the US market? [3 marks]

ii. What are the quantities consumed, produced, and imported in the US market? [2 marks]

iii. What are the resulting consumer, producer, and total social surpluses in US? [3 marks]

1c. If the US imposes a tariff t (in hundreds of dollars) on each e-reader imported,

i.Find the equilibrium prices of e-readers in the US corresponding to t = 2, 4, 6. [3 marks]

ii. For each of these tariff levels, find the equilibrium quantities consumed, produced, and imported in the US market. [3 marks]

iii. For the cases of t = 2 and t = 4 only, calculate the consumer, producer, and total social surpluses in the US. [3 marks]

iv. Compare the social surpluses attained for each of these two tariff levels in (iii) to the total social surplus under free trade. In each case, give the economic intuition for the difference. [2 marks]

1d. Draw a big, clear, and labelled graph of the US market showing the equilibriums for 1a, 1b and all 3 cases of 1c corresponding to t = 2, 4, 6. Axes should be labelled; intercepts of the graphs and actual values of prices and quantities should be indicated on the graph. [1+1+(3 x 1) =5 marks]

1e.The US government is interested in a tariff that maximizes US welfare (total social surplus). You are applying for a position as the economist advisor to the US government. How would you advise the government on the tariff rate? [3 marks]