Table 1 gives the effect of a tariff on cotton sweaters. (Assume there is no dif
ID: 1222204 • Letter: T
Question
Table 1 gives the effect of a tariff on cotton sweaters. (Assume there is no difference between domestically produced sweaters and foreign produced sweaters.)
a) Using an upward sloping domestic supply curve and a downward sloping demand curve, calculate the loss of consumer surplus from the tariff.
b) Calculate the deadweight loss as a result of the tariff.
c) Calculate the net welfare gain/loss for the country as a result of the tariff.
d) Based on the information given in Table 1, would the optimum import tariff on sweaters be negative, zero, or positive? Why?
Free Trade With a $4.00 Tariff 542.00 $4.00 $46.00 52 18 34 542.00 World Price of sweater Tariff per sweater Domestic Price of sweaters Sweaters consumed domestically (million Sweaters produced domestically (million sweaters/year) Sweaters imported (million packs/year) $42.00 60 12 48Explanation / Answer
a. Loss of consumer surplus = 4*52 + 1/2*4*(60-52) = 224
b. Dead weight Loss = 1/2*4*(60-52) + 1/2*4*(18-12) = 16 + 12 = 28
c. Change in Producer Surplus = 4*12 + 1/2*4*(18-12) = 60
Tax Revenue = 4*(60-52) = 32
Net Loss = 28
d. Optimum import tariff on sweaters will be zero, because any positive or negitive tariffs will create distortion in the market , and hence will create dead weight loss.
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