Question

Suppose we have the following demand and supply functions (taken from Ass HOME Demand P 100- 2Q Suppl PhQ FOREIGN Demand P 2002Q Supply P Q

Answer 1

Answer (a) : If the exporter imposes a $2 per unit export tariff, this would mean that the importer has to per $2 higher for every unit of import in to its economy. Let us suppose 10 units of quantity is being exported, then :

Demand in the home country :   P = 100- ½ Q

                                                             = 100 – ½ 10

                                                            = 100 – 5

                                                            = 95 + $2 more per unit

                                                            = 95 + 10

                                                            = 105

Supply in the home country = P= ½ Q

                                                       P = ½ 10

                                                        P = 5 + $2 per unit export tariff

                                                        = 5 + 10

                                                        = 15

Therefore, this is the new equilibrium price.

Answer (b): The producers surplus would be much higher in this scenario as the export amount of tariff imposed on the export items would finally benefit the producers , as the government may choose to reduce the taxes imposed on the producers. The consumer surplus may not be affected too much by this decision to impose tariff on the exported items.

Answer ( c) : The importer loose from the tariff, as now he would need to pay more amount for money for importing the same quantity of products as earlier. The exporter indirectly gains from the tariff, as the Government would return the excess income received form the tariff collection to the reporter in the form of tax deductions. However, if the import tariff, rises, then the situation of benefit reverses for the exporter. The exporter will have no impact on its export prices, however, the importer will still be required to pay more and will be at loss.

Answer (d) : Let us suppose the exporter exports 10 units of a product to a foreign country. The export price per product be 100. Therefore, the total revenue from the export of the products be:

                         Total revenue = Price per unit x number of units

                                                   = 100 x 10

                                                   = 1000

Now, since there is an imposition of export tariff of $2 per unit, the exporter will now be able to export the products at (100-2) = $98 per unit

                          Therefore, the total revenue after the imposition of the export tariff would be:

                        Total revenue = Price per unit x number of units

                                                   = 98 x 10

                                                   = 980

                 Hence, the exporter would loose a substantial amount of money when this export tariff is imposed by the Government.