Answer to Question #112665 in Microeconomics for Rubini Manokharan

Question

1. A country imports 3 billion barrels of crude oil per year and domestically produces another
3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel.
Assuming linear schedules, economist estimate the price elasticity of domestic supply (Es)
=0.25 and the price elasticity of domestic demand (Ed) to be 0.1 at the current equilibrium.
Suppose now there is an imposition of a $30 per barrel import fee on crude oil that would
involve annual administrative costs of $250million. Assume that the world price will not
change as a result of the country imposing the import fee, but that the domestic price will
increase by $30 per barrel.
i) Determine the quantity consumed, quantity produced domestically and quantity imported
after the imposition of the import fee.
ii) Determine the effect of the imposition of the import fee on consumer surplus, domestic
surplus and on government.
iii) Estimate the annual social net benefits of the imposition of the import fee.

Answer 1

i) the quantity consumed will decrease, the quantity produced domestically will increase, and the quantity imported will decrease after the imposition of the import fee.

ii) The imposition of the import fee will decrease consumer surplus, increase domestic

surplus, and provide additional tax revenue to the government.

iii) There will be the annual social net loss of the imposition of the import fee, because the domestic supply is more elastic than the demand, so the consumers suffer more than producers benefit.