Case Study for The Demand And Supply Of Television Sets In Venezuela

Questions: The table and graph shown below illustrate the demand and supply schedules for television sets in Venezuela, a "small" nation that is unable to affect world prices. In addition to the answer for each item below, describe in a few sentences how you solved each part of the problem. (This will allow the instructor to assign partial credit in case an answer is incorrect.)1. Suppose Venezuela imports TV sets at a price of $150 each. Under free trade, how many sets does Venezuela produce, consume, and import?2. 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.3. Calculate the quota's redistributive effect, consumption effect, protective effect, and revenue effect.4. 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?5. Suppose that foreign exporters organize as a monopoly seller. What is the overall welfare loss to Venezuela as a result of the quota? Answers: The demand and supply of television sets in Venezuela is given below: From the diagram we can figure out that the demand for television set and the supply of television equates at 450 and the corresponding price of the television set is $325 in Venezuela. So the equilibrium price is $325 and equilibrium quantity it as 450 (McTaggart, Findlay and Parkin, 2012). 1. Now trade opens up and Venezuela imports television sets. The following diagram gives the free trade condition of Venezuela: From the above diagram we infer that the world price of the television set is $150 which is also the free trade price. Here the domestic demand is 800 and the domestic supply is 100. A situation of excess demand of television set by the residents of Venezuela arises, which the domestic suppliers cannot satisfy. An excess demand of 700 (800-100) is covered up by importing 700 quantities of television set by Venezuela (McTaggart, Findlay and Parkin, 2012). Thus the import of television set is of 700 quantities at the world price of $150. Venezuela produces 100 quantities of television sets, consumes 800 quantities and imports 700 quantities of television sets. 2. Now suppose import quota of 300 TV sets is imposed. Then, there is a restriction of import which drives up the price but since Venezuela is a small country, there will be no impact on the world price and it will remain at $150. The free trade equilibrium price is at $150. At this price, the domestic demand is 800 and the domestic supply is 100. The import is given by the difference between the domestic demand and the domestic supply (Pindyck and Rubinfeld, 2013). In this case: Domestic demand Domestic Supply = 700 (800-100) Now Venezuela imposed a tariff of 300 TV sets which restricts trade from 700 to 300. The price goes up to $250. This implies that as quota is imposed consumers now have to purchase from the domestic producer, hence the domestic production increased to 300 TV sets and the domestic demand reduced to 600 TV sets. And so the new price is at $250 (Perloff, 2012). Now the loss in consumer surplus is marked by the area (A+B+C+D) which is due to rise in price because of import quota (McTaggart, Findlay and Parkin, 2012). 3. Now as import quota is imposed there are several effects that arise which are redistributive effect, consumption effect, protective effect and the revenue effect (Krugman and Wells, 2013). All these effects are depicted in the following diagram: Assuming the diagram we conclude that: Redistributive effect= (100*300)-(0.5*100*200) = (30000-10000) = 20000 Consumption effect= (800-600) = 200 Protective effect= (300-100) = 200 Revenue effect= (300*100) = 30000 4. If the import companies of Venezuela organize as buyers and bargain favourably with the competitive foreign exporters then there will be overall welfare loss to Venezuela as a result of the quota (Hubbard and O'Brien, 2013). The loss of surplus is shown by the blue lines in the diagram. 5. If the foreign exporters organize as monopoly seller then the price of the TV sets will be increased and thus the quota will lead to welfare loss to the country. Total welfare loss will be the area B+C+D in the diagram (Hoag, 2013). References Hoag, J. (2013).Intermediate microeconomics. Singapore: World Scientific. Hubbard, R., O'Brien, A. (2013).Microeconomics. Boston: Pearson. Krugman, P., Wells, R. (2013).Microeconomics. New York, NY: Worth Publishers. McTaggart, D., Findlay, C., Parkin, M. (2012).Microeconomics. Frenchs Forest, N.S.W.: Pearson. Perloff, J. (2012).Microeconomics. Boston: Pearson Addison Wesley. Pindyck, R., Rubinfeld, D. (2013).Microeconomics. Boston: Pearson.