Answer to Question #296984 in Microeconomics for makgorometsa

Question

2.2 Suppose South African government decides to impose a tax on the chickens that are imported from the United States. Use a diagram to show and explain the welfare cost that will result from the imposition of import tariff. [06]

2.3 The demand function for good (X) is given by Qx= 100 – 0.7Pz + 1.5Y – 0.3Px Where: Qx = Quantity demanded for good X Px = Price of good X Pz = Price of good Z Y = Level of income 

Calculate price elasticity of demand, income elasticity of demand and cross price elasticity of demand when Px = R80, Pz = R150 and Y = R300. Thoroughly interpret your results.

Answer 1

Solution:

2.2.). The imposition of an import tariff on imported chickens will result in the fall of national welfare. The import tariff will cause a redistribution of national income since the chickens will be more expensive to consumers. Producers will gain, while consumers will lose massively.

 

2.3.). Qx = 100 – 0.7Pz + 1.5Y – 0.3Px

Qx = 100 – 0.7(150) + 1.5(300) – 0.3(80) = 100 – 105 + 450 – 24 = 421

Qx = 421

Price elasticity of demand = $\frac{\triangle Qx}{\triangle Px}\times \frac{ Px}{Qx}$

$\frac{\triangle Qx}{\triangle Px} = -0.3$

Price elasticity of demand = $-0.3 \times \frac{ 80}{421} = -0.06$

 

Cross price elasticity of demand = $\frac{\triangle Qx}{\triangle Pz}\times \frac{ Pz}{Qx}$

$\frac{\triangle Qx}{\triangle Pz} = -0.7$

Cross price elasticity of demand = $-0.7\times \frac{ 150}{421} = -0.25$

 

Income elasticity of demand = $\frac{\triangle Qx}{\triangle Y}\times \frac{ Y}{Qx}$

$\frac{\triangle Qx}{\triangle Y} = 1.5$

Income elasticity of demand = $1.5\times \frac{ 300}{421} = 1.07$