Homework Answers
(I) Without tariff:
(i) Domestic demand (Qd) = 16 and Domestic supply (Qs) = 4
Import = Qd - Qs = 16 - 4 = 12
(ii) CS = (1/2) x (12 - 4) x 16 = 8 x 8 = 64
(iii) PS = (1/2) x (4 - 0) x 4 = 2 x 4 = 8
(iv) Tax revenue = 0
(v) SG (Social gain) = CS + PS = 64 + 8 = 72
(II) With tariff: (Price = $4 + $2 = $6)
(i) Qd = 12 and Qs = 6
Import = Qd - Qs = 12 - 6 = 6
(ii) CS = (1/2) x (12 - 6) x 12 = 6 x 6 = 36
(iii) PS = (1/2) x (6 - 0) x 6 = 3 x 6 = 18
(iv) Tax revenue = Unit tariff x post-tariff import = 2 x 6 = 12
(v) SG (Social gain) = CS + PS + Tax revenue = 36 + 18 + 12 = 66
(vi) DWL = Change in SG = 72 - 66 = 6
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