Question

QUESTION 3 The following diagram shows the domestic demand and domestic supply curves in a market. Assu $1 per unit T Price P st . o 0 - D 100 200 300 400 500 Quang Suppose the country imposes a S1 per unit tariff a What is the consumer surplus with the tarift? b. What is the producer surplus vith the tarift? How much tax retenue is generated by the tarif

Answer 1

Answer : Due to $1 per unit tariff the supply curve shift to leftward. As a result, at new equilibrium the price is $3.5 and quantity is 250 units. Here the elasticity of supply and demand curve are same hence both sellers and consumers will bear this $1 per unit tariff equally. This means that due to impose of $1 per unit tariff the consumers will pay $3.5 price and producers will receive $2.5 price level.

a) With tariff consumer surplus = 0.5 * height * base = 0.5 * (6 - 3.5) * 250 = $312.5 .

Therefore, here consumer surplus is $312.5 .

b) Producer surplus with tariff = 0.5 * height * base = 0.5 * (2.5 - 0) * 250 = $312.5 .

Therefore, here producer surplus is $312.5 .

c) Tax revenue = Per unit tariff * Quantity after tariff impose = 1 * 250 = $250.

Therefore, here the tax revenue is $250.