Question

2. Draw demand and supply curves to find the world price and tariff price of your goods. Suppose at the world price of $13; 10,500 units are produced domestically, and 16,700 units are consumed. When a tariff of $2 per unit causes the price to rise to $15, domestic production rises to 12,000 units, and domestic consumption falls to 14,500 units. 1) Construct demand and supply functions.

Answer 1

The diagram can be drqwn as follows, where point A respresents domestic production of 10,500 and point D represents consumption of 16,700 with world price. When price increases to 15 due to imposition of tariff, the domestic production increases to 12,000 (point B) and at the domestic consumption reduces to 14,500 (point C) as shown in the diagram.

With world price of #13, the import level = 16,700 - 10, 500 = 6,200.

When tariff was introduced, the import level becomes 14,500 - 12,000 = 2,500.