Economics Worksheet With Answers - 2011 (Page 5 of 6) in pdf

Economics Worksheet With Answers - 2011 Page 5

5. The Figure below represents U.S. Imports from Mexico and Asia.

a. The figure illustrates a customs union between the United States and Mexico. Under free

trade how much of the good will the United States will import from which country at what

price?

From the graph, the United States will import 250 units from Mexico at a price below

$150, and will import 350 units from Asia at a price of $150.

b. What will total imports be if the United States imposes a tariff of $100?

With the $100 tariff, United States import demand intersects the Asian supply line

(price) at 500 units.

c. With the $100 tariff, how much will the United States will import from Mexico and from

Asia?

From the graph, the United States will import 250 units from Mexico at a price below

$250, and will import 250 units from Asia at a price of $250.

d. The $100 tariff by the United States results in how much tariff revenue?

With the tariff of $100, imports are 500 units (part b) at a tariff of $100 per units for a total of

$50,000 in tariff revenue.

e. If the United States forms a customs union with Mexico, will it result in an increase or a

decrease in producer surplus for Mexico and how large will it be?

With the customs union, Mexico will export 400 units. Mexico will saving the rectangle

between the $150 and $250 price lines and the price axis and the 250 quantity line plus the

upper part of the rectangle (the triangle) between the $150 and $250 price lines and the 250

and the 400 quantity line. The rectangle is $25,000 and the triangle is $7,500 for an increase

in producer surplus of $32,500.

f. The combined welfare of the United States and Mexico will be higher or lower by what

amount?

g. The United States looses tariff revenue of $40,000 (400 units at $100 each) and Mexico gains

producer surplus of $32,500 (from part e), so the result is a $7,500 loss of combined welfare.

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Economics Worksheet With Answers - 2011 Page 5