Question

Price Cosievenue BEDAZZLED TRE SWINGS World Price plus Tarif World Price Demand ( US) 35 35 40 45 50 55 60 * Quantity Use the figure above to answer the following questions: The questions below require a numerical answer (not the letter identifier) Assume "free trade" (no tariff): 1. How much is consumer surplus? (2 points) 2. How much is producer surplus? (2 points) Assume the above tariff is imposed: 3. How much is the tariff shown in the above figure? (2 points) 4. How much is consumer surplus? (3 points) 5. How much is producer surplus? (3 points) 6. How much is the Dead Weight Loss? (3 points) 7. How much revenue is raised by the tariff? (2 points) / 17 points

Answer 1

1. Under free trade,

Consumers surplus (area below the demand curve and above the price) = area (A + B + C + D + E + F + G) = (1/2) * 60 * (90 - 30)= $1800

2. Producers surplus (area below the price and above the supply curve) = area H = (1/2)* 30*15 = $225

3. Tariff = $(40 - 30) = $10

4. Consumers surplus with tariff = area (A + B + C) = (1/2)*(90 - 40)*50 = $1250

5. Producers surplus with tariff = area (D + H) = (1/2)*20*40= $400

6. Deadweight loss = area E + area G = [(1/2)*(40-30)*(20-15)] + [(1/2)*(40-30)*(60-50)] = $(25+50) = $75

7. Tariff revenue = tariff amount * after tariff import = (40 - 30)*(50 - 20) = $300