Consider the following graph of a country which imports from a foreign monopoly

Question

Consider the following graph of a country which imports from a foreign monopoly producer: What quantity of this good does the home country consume, and at what price? Suppose the home importing country imposes a $2 tariff. What is the new price and quantity of imports? (Assume the demand and marginal revenue curves are linear). What is the government revenue from the tariff? How much of this revenue comes from foreign producers? What is the deadweight loss from this tariff? Did the home country come out ahead by imposing this tariff?

Explanation / Answer

For quantity MR=MC

Q=100; see where that vertical line from 100 is touching demand line. P=$15.

b. Demand equation is P=25-0.1Q.

WHen P=17 due to tariff, Q will be 80.

c. Revenue from tariff = 80*2 = 160

Nothing comes from foreign producers.

Deadweight loss would be area of triangle formed by prices 17,15 and quantity 100,80. Price is the height and QUantity is the base. Area of the triangle = 0.5 base * height

=0.5*2*20 = 20

d. It has come out. Because deadweight loss is 20 and revenue from tariff is 160

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