Name Key

The market for better burgundy wines in the United States is described by the following pair of equations

P = 3600 - 3 Q      Domestic Demand

P = 600 + 3 Q       Domestic Supply

where P is the price per pallet of one hundred bottles of wine and Q is thousands of pallets of wine.  Such wines are produced in both California and in the rest of the world (ROW).  It is strongly recommended that you graph the market for wine in the U.S. as you work through this problem set.

1. On the lines next to the equations indicate which is domestic demand and which is domestic supply.

2. Suppose that no wines are imported into the United States.  What will be the equilibrium quantity and price in the domestic market?

Domestic Price = Domestic Quantity =

3600 - 3Q = 600 + 3Q

6Q = 3000

Q = 500

P = 3600 - 3(500) = 2100

3. What is the amount of consumer surplus when the domestic market is closed to foreign trade?

CS = 1/2 (3600 -2100)(500) = 750*500 = 375,000

4. What is the amount of producer surplus when the domestic market is closed to foreign trade?

PS = 1/2 (2100 - 600)(500) = 375,000

5. What is the amount of total economic surplus when the domestic market is closed to foreign trade?

ES = 375000+375000 = 750,000

6. The U.S. market is opened to foreign trade.  There are no trade barriers.  The world price of burgundy is $1200.  Once U.S. consumers can purchase on the world market it is possible for them to buy all they want at the world price.  At the world price of wine how many pallets of wine will U.S. consumers want to purchase, regardless of the origin of that wine? 

1200 = 3600 - 3Q

2400 = 3Q

Q = 800

7. At the world price of wine how many pallets of wine will be supplied by U.S. vineyards?

1200 = 600 + 3Q

600 = 3Q

Q = 200

8. How many pallets of wine are imported into the U.S.?

800 - 200 = 600

9. When there is free trade what is the amount of consumer surplus? Remember that consumer surplus does not depend on the country of origin of the bottle of burgundy consumed.

CS = 1/2 (3600 - 1200)(800) = 1200*800 = 960,000

10. When there is free trade what is the amount of producer surplus for domestic producers of burgundy?

PS = 1/2 (1200-600)(200) = 60,000

11. Do US consumers prefer free trade in burgundy or an embargo on imported burgundy? Free trade or embargo.

12. Do domestic producers prefer free trade in burgundy or an embargo on foreign burgundy? Free trade or embargo.

13. When comparing free trade with the complete prohibition of wine imports, what is the deadweight loss associated with the prohibition?

DWL = 1,020,000 - 750,000 = 270,000

14. A tariff of $300 per pallet is imposed.  As a consequence the de facto world price of burgundy to U.S. consumers rises to $1500. At the new effective world price what will be the number of pallets of wine purchased from all producers by U.S. consumers?

1500 = 3600 - 3Q

2100 = 3Q

Q = 700

15. At the new effective world price of burgundy what will be the number of pallets of wine supplied by U.S. produces?

1500 = 600 + 3Q

900 = 3Q

Q = 300

16. After the tariff how many pallets of wine are imported into the U.S.?

700 - 300 = 400

17. How much tariff revenue is collected?

Tariff revenue = 300*400 = 120,000

18. After the tariff, what is the amount of consumer surplus?

CS = 1/2 (3600-1500)(700) = 735,000

19. After the tariff, what is the amount of domestic producer surplus?

PS = 1/2 (1500 - 600)(300) = 135,000

20. When comparing free trade with the results of imposing a tariff of $300 on wine imports, what is the deadweight loss associated with the tariff?

DWL = 1,020,000 - 870,000 = 150,000

From this point forward it is even more important that you draw a graph of the U.S. market for wine.

21.  Suppose that the tariff is removed and the world price remains at $1200 per pallet, but an import quota is established.  The import quota is 200 pallets.  At a U.S. price of $600 U.S. manufacturers will produce  0, nada, zero, zilch pallets of wine and the rest of the world will supply 0, nada , zero, zilch pallets to the U.S. market.

22.  When there is no tariff and the quota rule is in place, how high must the U.S. price have to rise before foreign producers export to the U.S. market? 1200

23. Under the quota rule and at the price you found in 22., what is the least quantity of wine will be supplied to the U.S. market 200 and what is the greatest quantity that will be supplied to the U.S. market 400?

24. Suppose the U.S. price rises to $1600. At that price the quantity supplied by domestic producers will  be 1600 = 600 + 3Q, Q = 333.334 and the quantity imported from foreign producers will be 200?

25. When there is a quota on wine imports, what will be the equilibrium price and quantity in the U.S. market?

Price = Quantity =

From the figure below; P = 1800 and Q = 600

26. Under the quota rule what is consumer surplus?

CS = 1/2 (3600-1800)(600) = 540,000

27. Under the quota rule what is the surplus accruing to U.S. wine producers?

PS = 1/2 ( 1800 - 600 )(400) = 240,000

28. Under the quota rule what is the total domestic economic surplus?

ES = 780,000

28. By comparison to the free trade case what is the deadweight loss associated with the quota rule?

DWL = 1,020,000 - 780,000 = 240,000