Assume India is an importer of televisions and there are no trade restrictions. Indian consumers buy 10,000 televisions per year, of which 4,000 are produced domestically and 6,000 are imported...

Question: Assume India is an importer of televisions and there are no trade restrictions. Indian consumers buy 10,000 televisions per year, of which 4,000 are produced domestically and 6,000 are imported. Suppose that a technological advance among Japanese television manufacturers causes the world price of televisions to fall by Rs. 100. After the fall in price, Indian consumers buy 12,000 televisions, of which 2,000 are produced domestically and 10,000 are imported. Calculate the change in consumer surplus, producer surplus, and total surplus from the price reduction of Rs. 100.

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Answer:

When the world price of televisions falls by Rs. 100, the change in consumer surplus, producer surplus, and total surplus can be calculated as follows:

Initially, Indian consumers buy 10,000 televisions, with 4,000 produced domestically and 6,000 imported. After the price reduction, they buy 12,000 televisions, with 2,000 produced domestically and 10,000 imported.

Change in Consumer Surplus:

Consumer surplus increases due to the price reduction and the additional quantity purchased. The gain from the price reduction on the initial quantity is Rs. 100 times 10,000 televisions, which equals Rs. 1,000,000. The gain from the additional 2,000 televisions purchased is half of Rs. 100 times 2,000, which equals Rs. 100,000. Therefore, the total increase in consumer surplus is Rs. 1,100,000.

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Change in Producer Surplus:

Producer surplus decreases due to the price reduction and the reduced quantity produced. The loss from the price reduction on the initial domestic production is Rs. 100 times 4,000 televisions, which equals Rs. 400,000. The loss from the reduction in domestic production is half of Rs. 100 times 2,000, which equals Rs. 100,000. Therefore, the total decrease in producer surplus is Rs. 500,000.

Change in Total Surplus:

Total surplus is the sum of consumer surplus and producer surplus. The net change in total surplus is Rs. 1,100,000 (increase in consumer surplus) minus Rs. 500,000 (decrease in producer surplus), resulting in a net increase of Rs. 600,000.

In summary, the price reduction leads to a significant gain in consumer surplus, which more than offsets the loss in producer surplus, resulting in a net increase in total surplus for the economy.