Question

4. Consider the effect of a tariff in a small nation. Initially, under free trade the quantity supplied in a country is 24 units, the quantity demanded is 60 and the world price is $ 6 per unit. A tariff is introduced which raises the domestic price to $ 7 per unit. The elasticity of demand is -0.3 and the elasticity of supply is 0.5. Calculate the effects of the tariff on: producer revenue, consumer expenditure, the trade balance and total welfare.

Answer 1

My 2010 Under free trade Quantity demanded (Qd) = 60 Quantity supplied (QQ) = 24 Price $6 Clasticity of Demand = -03 elasticity of supply = o.s Now we need to calculate the intercept of Demand & supply curve elasticity of Demand t) slube for do (where lo &Qo are the initial price &quantity 1 Respectively -0.35 stupe & to - 03- stope oto stope = -3 POPP Now Slope = - 13 Demand Junction cabe a written as Qo = a-bp where a intercept be slope !

at Price 6, Quantity demanded in to (given) Substitute this in Demand function & Go = a -1 (6) In case of Shvercetion bo= a 2 = [P= a-bq [a= 62] Go= a-2 IP= a-bq we have ( so intercept in 62 P= 186-30) Demand function Yo elasticity supply a) steke beste hain Slobe 0.5 stoße * 244 function stope = 2 I slope of supply curve = 1/2 Supply function can be written as Qs = atbp . In case of Inverse at P=6, Qs = 24 =) + 24 = at (6) Ja= 21 - supply intercept P= -42 +2Q] Supply function

Plotting & the demond & supply function 186 Two -42+28 Do 6 2186-3Q D 21/A 24 -42 under Free trade Producer revenue = tem magat no. of units sold & Price 24 x 6 = 144$ Consumer expenditure = no. of units purchased X Prize 60X6 = 360$ Trade balance = no. of units imported & Price - 3686 - 216 $

Producer surplus Area of Rectangle OABC + Area of triangle ABF = {DA XOC) + ( x 8 FB XAB) = (21X6)+ (2 X 3x6) = 26+ 9 Producer Surplus Coro = 1354 SO Consumer Surplus = Area of triangle CGN. = 2 x G x CN = I x box 180 = 400$ Total surplus - 5535$ / Producer surplust Total welfare After Imposition of tariff Consumer surplus S -42+20 -42 +2 1 of 24 245 5906760 2 1 1 1 1 1 1 1 1 1

Q QO008 ਇB ARRRRRRRR Quantity Demanded = a-bp. Qd = 62- 4x7 Qd = 62-2.33 | Qd=59.67 Quantity supplied atbp alt txt Qs = 24.5] Producer's rucnue (after tariff) = 24.5 x 7 = 171.5$ expenditure, consumers who come =59.67X 7 = 417.69 $ 31993) Trade balance = no dunits imported & Price 35.1787 = 246.19 $ Producer's surplus = Aread Rectangle Ave + Area of triangle AUS COEXOA) + (₂ X US XAU).

GOOGGLAM = (21x7) + ( 1₂ x 35x7) = 147 + 12.25 IF 159.256 Consumer surplus Area of triangle ETN - 3xстxew = 2 x 59.678 179 ( = 5340.465$ Total welfare Producer surplus + Consumer surplus. - 159-25 +5340.465 Total welfare [= 5499.7158 Pro Conclusion, After the imposition of tariff. T Producer revenue has increased from 1418 to 171.58 Consumer expenditure has increased from 360$ to 417.69 $ Trade balance (which is deficit) has increased from 216 8 to 246.19 Producer surplus has increased from 135$ to 159.258 Consumer surplus soo has fallen from 54008 to 5340.4658 Total welfare has fallen from 5935$ to 5499.715 2 2