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The supply and demand for light bulbs in XYZ are given as follows:
QS = 350 + 35P
QD = 650 - 15P
Note: Be sure to show your calculation.
Find the following
a) Will XYZ export or import light bulbs if the initial world price of light bulbs is $4 per unit? What is the level of trade (i.e., the quantity exported/imported)? Initially, the initial world price of light bulbs is $4 per unit (same as part a). In addition, XYZ is a large open economy in the world market for light bulbs; therefore, imposition of any trade policy by XYZ will change the world price by $0.2 per light bulb. In attempt to protect domestic industry, the government of XYZ imposes an (ad valorem) import tariff and the tariff rate is set at 25% of the initial world price.
b) What happens to the world price of light bulbs? Find the new volume of trade. Explain.
c) Find the change in total surplus in XYZ as a result of the imposition of tariff. Also, decompose the sources of the change in total surplus (i.e., explain and identity the change in total surplus due to the consumption distortion loss and other sources of gains or losses. Be sure to show the calculation in your answer).
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