Question

Consider an importing with an import demand function given by p=120-q, which faces an export supply function of p=2q. The governent decides to impose a traiff of $3 per units of imports

1. calculate the Domestic Price and consumption before and after the imposition of traiff.

2. What is the world price of the imprts before and after the imposition of the traiff?

3. Does this country benefit from the imposition of traiffs? By how much?

Answer 1

1) p=120-q.

export supply function of p=2q To calculate price,equate demand and supply;

120-q=2q

Therefore q=40 and P=80 Consumption before tariff=40

Consumption after tariff is given by=>

80+3=120-q or

q=37

Consumption after tariff is 37.

2) world price of the imports before tariff is 40 and after tariff is 74; p=2 x 37

3) Yes,this country benefits from the imposition of traiffs

Loss of consumer surplus=(0.5x(120-80)x40)-(0.5x(120-83)x37)=115.5

Gain of producer surplus= ((0.5x 74 x 37)+((83-74)x37)-(0.5x80x40)=102

Government Revenue= 3 x 37=111

Total welfare Increase=111+102-115.5=97.5