Question

The diagram above shows how the imposition of a sales tax affects the market. Producer surplus before the tax is areas a 1, 2, 3, 4 6. 5, 6, 7, 8, 9 c. 1, 2 d. 5,8 The imposition of a tariff in a market will usually result in a. an increase in consumer surplus, an increase in producer surplus, and an increase in total surplus. b. an increase in consumer surplus, an increase in producer surplus, and a decrease in total surplus. c. a decrease in consumer surplus, an increase in producer surplus, and an increase in total surplus. d. a decrease in consumer surplus, an increase in producer surplus, and a decrease in total surplus.

Answer 1

Answer 1. b. 5,6,7,8,9

Reason- before tax supply curve is S and price is P.

Producer surplus is the area below the price level and above the supply curve.

So producer surplus=5+6+7+8+9.

Answer 2. a decrease in consumer surplus, an increase in producer surplus and decrease in total surplus.

reason- Price after tariff is greater than free trade price level.

This results in fall in Consumer surplus as they have to oay higher price.

Producer surplus Increases as they receive higher price now.

But tariff leads to deadweight loss due to fall in quantity.

Even though Government receives revenue.

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