Question

Suppose that under free trade, country A is a small importer of good Z at the...

Suppose that under free trade, country A is a small importer of good Z at the amount M1. The government is considering imposing some trade restriction to reduce the amount of imports to M2(<M1).

  1. (6 points) Use a graph to analyze the impact of a tariff t that reduces the amount of import to M2 on country A’s domestic market price, consumption, production, and welfare. Clearly label the graph for full credits.

Homework Answers

Answer #1

When the country is open to international trade then the world price is less than the domestic equilibrium price so the price is PW at which quantity demanded is D1 and quantity supplied is S1 so the imports M1=D1-S1

When a tariff is imposed,the price will increase with the amount of tariff to PW+T = PT,where the quantity demanded is Q2 and quantity supplied is S2 so the imports decreases to M2=D2-S2

CS before the tariff = area C+A+B+G+D

CS after tariff = area C so the consumers loses -A+B+G+d

PS before tariff = area P

PS after tariff = area P+A so the producers gains +A

Government revenue before tariff = 0

Government revenue after tariff = area G

DWL before tariff = 0

DWL after the tariff = area B+D

Total welfare after the tariff decreases by the area of deadweight loss = -B+D

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