Question

The domestic demand for radio is given by Q= 5000 - 100 P. The domestic supply curve for radio is given by Q= 150P. Suppose radios can be imported at a world price of $10 per radio.

1) Now suppose domestic radio producers succeed in getting a $5 tariff implemented, how many radios would be imported?

2) How much would be collected in tariff revenue?

3) How much consumer surplus would be transferred to domestic producers?

4) What would the deadweight loss from tariffs be?

Answer 1

In equilibrium

QD=QS

5000-100P=150P

5000=250P

P=20 so Q=5000-100(20) = 3000

1) When domestic producers succeed in having a $5 tariff implemented so the world price will increase to $15 at which domestic demand will be 5000-100(15) = 3500 and domestic supply will be 150x15 = 2250

So,IMports = 3500-2250 = 1250

2) Tariff revenue = 1250x5 = 6250

3) DWL due to supply change= 1/2 x (2250-1500) x 5 = 1875

CS transferred = 2250x5 - 1875 = 9375

4) DWL due to change in demand = 0.5 x (4000-3500)x5 = 1250

So, DWL = 1875+1250 = 3125