Question

Suppose the world price for a good is

3030

and the domestic​ demand-and-supply curves are given by the following equations and displayed by the figure to the​ right:

​Demand:	P​ =	9090 minus− 33Q
​Supply:	P​ =	66 ​+ 33Q

a. At the world​ price, total domestic consumption is

2020

units.b. At the world​ price, the total amount of home production is

88

units. nothingc. The value of consumer surplus is

​$600600

and the value of producer surplus is

​$nothing.

nothingd. If a tariff of

2020

percent is​ imposed, consumption will become

nothing

units and domestic production will become

22

units.e. As a result of the​ tariff, consumer surplus will become

​$nothing

and producer surplus will become

​$nothing.

nothingf. The total amount of tax revenue earned by the government from the tariff is

​$nothing.

g. The net national cost of the tariff is

​$nothing.

nothing

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Upper P Subscript wPw

DS

Answer 1

Demand: P = 90 - 3Q

Supply: P = 6 + 3Q

When world price is $30,

(a) From demand function: 30 = 90 - 3Q

3Q = 60

Q = 20 (domestic demand)

(b) From supply function: 30 = 6 + 3Q

3Q = 24

Q = 8 (domestic supply)

(c)

From demand function, when Q = 0, P = 90 (vertical intercept)

Consumer surplus (CS) = Area between demand curve & price = (1/2) x (90 - 30) x 20 = 10 x 60 = 600

From supply function, when Q = 0, P = 6 (vertical intercept)

Producer surplus (PS) = Area between supply curve & price = (1/2) x (30 - 6) x 8 = 4 x 24 = 96

(d) Tariff will increase price by 20%, to ($30 x 1.2) = $36. At this price,

From demand function: 36 = 90 - 3Q

3Q = 54

Q = 18 (domestic demand)

From supply function: 36 = 6 + 3Q

3Q = 30

Q = 10 (domestic supply)

(e)

New CS = (1/2) x (90 - 36) x 18 = 9 x 54 = 486

New PS = (1/2) x (36 - 6) x 10 = 5 x 30 = 150

(f) Tariff revenue = Unit Tariff x (Domestic demand - Domestic supply) = 30 x 20% x (18 - 10) = 6 x 8 = 48

(g) Net national cost = (1/2) x Unit Tariff x (Change in domestic demand + Change in domestic supply)

= (1/2) x 30 x 20% x [(20 - 18) + (10 - 8)] = 3 x 4 = 12