7.(20 Point) The figure below shows a country\'s domestic supply and demand curv

Question

7.(20 Point) The figure below shows a country's domestic supply and demand curves, S and D, for a good, as well as the world price of the good, Pw, that it faces, as a small country, on the world market. Initially, however, the country is not trading freely, but is instead imposinga tariff on imports of this good that causes the domestic price to be Pd, as shown P. li 22 2s 24 25 a. Identify the autarky price in the figure, and label it P b. Identify the size of the tariff in the figure, and label it t. Various quantities are labeled on the axes as Q1, Q2, .., etc., while several areas in the figure have been labeled a, b, c, etc. Use these labels to answer the following questions; c. What is the quantity produced in autarky? d. What is the quantity produced domestically with the tariff? e. What is the change in quantity demanded if the tariff is removed? f. What is the value (price times quantity) of imports in the presence of the tariff, valued at the world price? g. What is the tariff revenue? h. What is the loss of producer surplus when the tariff is removed? i. What is the gain in consumer surplus when the tariff is removed?

Explanation / Answer

a) The autarky price in the given diagram will be at the point where Domestic demand and supply curve meet. It is at quantity Q3. and Price Pa.

b) The size of the tariff in the figure will be the area labeled as "e" and "f" combined.

c) The quantity produced in the autarky was Q3 at price Pa.

d) Quantity produced locally with the tariffs is Q2.

e) If the tariff is removed the quantity demanded will increase from Q4 (With tariff) to Q5 (without tariff).

f) In the presence of tariffs, the consumer consumes at quantity Q4 out of which Q2 is produced domestically and the difference between Q4 and Q2 is imported. That is "j" and "k" at the world price.

g) Tariff revenue is the sum total of the area given as "e" and "f".

h) The loss of producer surplus is the whole area marked as "c" if the tariff is removed.

i) The gain in the consumer surplus if the tariff is removed will be the whole area of "c", "d", "e", "f", "g".

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