The following figure shows the domestic demand and domestic supply curves for t-
ID: 1103345 • Letter: T
Question
The following figure shows the domestic demand and domestic supply curves for t-shirts in Nicaragua. Assume that the world price in this market is $5 per t-shirt. Answer the questions below based on this figure.
1. Refer to figure 2. Suppose the country imposes a tariff of $2 per t-shirt. If the country allows trade with a tariff, what will be the domestic price in this market?
a. $2
b. $10.
c. $11
d. $7.
1. Refer to figure 2. Which of the followings is true if the country allows trade with a tariff of $2 per t-shirt?
a. Consumer’s surplus will increase compared to free trade.
b. Consumer’s surplus will decrease compared to free trade.
c. Both consumer’s surplus and producers surplus will increase compared to free trade.
d. Both consumer’s surplus and producers surplus will decrease compared to free trade.
Price of t-shirts| 30 Domestic Supply 10 World Price 2 Domestic Demand 200 300 500 Quantity of t-shirtsExplanation / Answer
Q1
Answer
The price after tariff = world price+tariff=5+2=$7
option d
Q2
Answer
b. Consumer’s surplus will decrease compared to free trade.
The consumer surplus decrease and producer surplus increase because the price is increased.
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