Question

# QUESTION 3 The following diagram shows the domestic demand and domestic supply curves in a market.... 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 : 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.

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