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Non tariff trade barriers

The table below are the demand and supply schedules for television sets in Venezuela, a "small" nation that is unable to affect world prices.

Price per TV set Quantity Demanded Quantity Supplied
$100 900 0
200 700 200
300 500 400
400 300 600
500 100 800

a. Suppose Venezuela imports TV sets at a price of $150 each. Under free trade, how many sets does Venezuela produce, consume, and import? Determine Venezuela'a consumer surplus and producer surplus.

b. Assume that Venezuela imposes a quota that limits imports to 300 TV sets. Determine the quota-induced price increase and the resulting decrease in consumer surplus. Calculate the quota's redistributive effect, consumption effect, protective effect, and revenue effect. Assuming that Venezuelan import companies organize as buyers and bargain favorably with competitive foreign exporters, what is the overall welfare loss to Venezuela as a result of the quota? Suppose that foreign exporters organize as a monopoly seller. What is the overall welfare loss to Venezuela as a result of the quota?

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Solution Preview

a. Since $150 is halfway between $100 and $200, the demand will be 800 and the quantity produced will be 100. Because supply is 700 short of demand, 700 televisions will be imported. To determine consumer surplus, we need to find the area under the demand curve. To conceptualize this, first plot out the demand curve and show the area of consumer surplus at P=$150. This is the blue triangle on the attached file "noquota". The base of this triangle is 800 and its height is 600-150=450, so its area is .5 x 450 x 800=180000.
Producer surplus is defined as the difference between what producers actually receive when selling a product and the amount they would be willing to accept for a unit of the good. It can be graphically be ...