Question 1. The world price for baseballs is $24 per dozen, and almost all of them are produced outside the U.S. Suppose the U.S. demand curve is QD =100,000 - 2,000P, where P is price per dozen, and Q is measured in dozens. The U.S. domestic supply curve is Qs = - 10,000 + 1,000P. Please explain in words and graphically.
a. Before a tariff is imposed, what is the U.S. equilibrium price? Domestic consumption? Domestic production? And imports?
b. Congress has decided to help the baseball manufacturing industry by imposing a tariff of $6 per dozen. What is the new equilibrium price? Domestic consumption? Domestic production? And imports?
c. What are the losses to U.S. consumers, gains to U.S. producers, and deadweight loss?
d. What quota level would have the equivalent effect on price as the $6 tariff?
e. What is the deadweight loss from the quota?
Question 2. Consider the following scenario:
The probability of a fire in a factory without a fire prevention program is 0.01. The probability of a fire in a factory with a fire protection program is 0.001. If a fire occurred, the value of the loss would be $300,000. A fire prevention program would cost $80 to run.
Answer the following questions with explanations on how you arrive at your answers:
a. If there is no insurance and there is a fire protection program in place, what is the expected loss from fire for this company?
b. If there is no insurance and no fire protection program in place, what is the expected loss from fire for this company?
c. If the fire protection program were in place, what amount could the company insure the warehouse for a premium equal to?
d. If the fire protection program were not in place, what is the minimum amount the insurer be willing to ensure the warehouse for?
e. What is the possible moral hazard that may arise in this situation?
f. How can it be eliminated?