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

1) At a world price of $10,

Domestic demand = 5000 - 100P = 5000 - 100(10) = 4,000.

Domestic Supply = 150P = 150(10) = 1,500.

When a tariff of $5 is imposed, the price becomes $15. At this price:

Domestic demand = 5000 - 100P = 5000 - 100(15) = 3,500.

Domestic Supply = 150P = 150(15) = 2,250.

Import = 3500 - 2250 = 1,250 radios

2) Tariff revenue = $5 * 1250 = $6,250

3) consumer surplus transferred to domestic producers = ($5 * 1500) + 0.5[$5 * (2250 - 1500) = 7500 + 1875 = $9,375

4) DWL = 0.5[$5 * (2250 - 1500) + 0.5[$5 * (4000 - 3500) = 1875 + 1250 = $3,125