The above figure shows the domestic supply of and domestic demand for an importe

Question

The above figure shows the domestic supply of and domestic demand for an imported good. The worldprice is $15 per unit.

a) At the world price of $15 per unit, what is the domestic consumption and domestic production?

b) At the world price of $15 per unit, what is the quantity imported?

c) If the government imposes a tariff of $5 per unit, what is the domestic consumption and domesticproduction?

d) With the $5 per unit tariff, what is the quantity imported?

e ) How much revenue does the government collect with a tariff of $5 per unit?

The above figure shows the domestic supply of and domestic demand for an imported good. The worldprice is $15 per unit. a) At the world price of $15 per unit, what is the domestic consumption and domestic production? b) At the world price of $15 per unit, what is the quantity imported? c) If the government imposes a tariff of $5 per unit, what is the domestic consumption and domesticproduction? d) With the $5 per unit tariff, what is the quantity imported? e ) How much revenue does the government collect with a tariff of $5 per unit?

Explanation / Answer

A and B are pretty easy. Look at the line on the graph where the price is 15, Domestic Production is found by looking at where this line intersects the supply curve. Domestic consumption is likewise found by seeing where the line intersects the demand curve. The quantity imported is then the difference between the two quantities. Here at the world price of 15, the domestic quantity consumption is 8 million units and domestic production is 0 units. The quantity imported at $15/unit is therefore 8 million units C. add five dollars to the world price, and find the line for that price. Again find where that price intersects the supply and demand to get the new quantities for domestic consumption and production Here the domestic consumption is 6 million units and domestic production is 2 million units D. Using the quantities found in C, find the difference between the two as in part B. The quantity imported is 4 million units under the tariff E. The tariff will be imposed on each unit imported under the tariff. So use the quantity found in part D (the quantity imported under the tariff) and multiply that by the tariff amount of $5 per unit and that will show the revenue collected by the government under the tariff. At a $5 per unit tariff, with 4 million units, the revenue raised by the tariff is $20 million

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