Question

3. You are given the following information about motorcycles in the United States:

	Situation with 5% Tariff	Situation without Tariff
World Price	$2,000 per cycle	$2,050 per cycle
Tariff at 5%	$100 per cycle	0
US Domestic Price	$2,100 per cycle	$2,050 per cycle
US Consumption	100,000	105,000
US Production	40,000	35,000
Imports	60,000	70,000

INCLUDE CALCULATIONS FOR THE FOLLOWING:

a. Calculate the gain to US consumers from removing the tariff.
b. Calculate the loss to US producers from removing the tariff.
c. The loss in tariff revenue to the US government from removing the tariff.
d. Calculate the net gain or loss to the US economy as a whole from removing the tariff.

e. Represent the information using a neatly labeled diagram depicting the US domestic demand and supply curves. Using the values that you are provided with, label the following on your graph:
(i) domestic production with and without the tariff
(ii) domestic consumption with and without the tariff

(iii) imports with and without the tariff
(iv) domestic price with and without the tariff.

f. Given the information, can you determine whether the importing country is small or large? How?

Answer 1

(a)

Gain to Consumers = (1/2) x Unit tariff x (Domestic consumption before tariff + Domestic consumption after tariff)

= (1/2) x $100 x (100,000 + 105,000)

= $50 x 205,000

= $10,250,000

(b)

Loss to producers = (1/2) x Unit tariff x (Domestic production before tariff + Domestic production after tariff)

= (1/2) x $100 x (40,000 + 35,000)

= $50 x 75,000

= $3,750,000

(c)

Loss in tariff revenue = Unit tariff x Import after tariff

= $100 x 60,000

= $6,000,000

(d)

Net gain to economy = Gain to consumers - Loss to producers - Loss in tariff revenue

= $(10,250,000 - 3,750,000 - 6,000,000)

= $500,000

NOTE: As per Answering Policy, 1st 4 parts are answered.