( Import price is 12,000 AED per metric tonne. ) The total domestic demand for c
ID: 1152449 • Letter: #
Question
( Import price is 12,000 AED per metric tonne. )
The total domestic demand for chicken meat in the UAE was 400,000 Tonnes, out of which 12.5% of the supply was from domestic production while 87.5% is from import. Suppose that the UAE government imposes 5%. Following the imposition of tariff, it is estimated that domestic production increases by 10% while import reduces by 15%. Total consumption demand is met by domestic supply and foreign import ( Import price is 12,000 AED per metric tonne. )
1- Determine the effect of tariff on consumers (1.5 points)
2- Determine the effect of tariff on producers (0.5 points)
3- Determine the effect of tariff on government income (0.25)
4- Determine the net welfare effect of the tariff on the country (0.50)
5- Determine the economic inefficiency as a result of the import tariff (0.5)
6- What is the overall effect of the tariff on the UAE economy. Explain (0.25).
7- Use a graph to illustrate the solution (0.5)
Explanation / Answer
Before tariff,
World (import) price = AED 12,000
Domestic demand = 400,000
Domestic supply = 400,000 x 12.5% = 50,000
Import = 400,000 x 87.5% = 350,000
After tariff,
Domestic price = AED 12,000 x 1.05 = AED 12,600
Domestic supply = 50,000 x 1.1 = 55,000
Import = 350,000 x 0.85 = 297,500
Domestic demand = 55,000 + 297,500 = 352,500
(1)
Tariff will lead to higher price, decreasing consumer surplus (CS), making consumers worse-off.
Loss in CS (AED) = (1/2) x (12,600 - 12,000) x (400,000 + 352,500) = (1/2) x 600 x 752,500 = 225,750,000
(2)
Tariff will lead to higher price, increasing producer surplus (PS), making producers better-off.
Gain in PS (AED) = (1/2) x (12,600 - 12,000) x (50,000 + 55,000) = (1/2) x 600 x 105,000 = 31,500,000
(3)
Government Tariff revenue (AED) = (12,600 - 12,000) x 297,500 = 600 x 297,500 = 178,500,000
(4)
Net welfare loss (AED) = Loss in CS - Gain in PS - Tariff revenue = 225,750,000 - 31,500,000 - 178,500,000
= 15,750,000
NOTE: As per Chegg Answering Policy, 1st 4 parts are answered.
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