Using the data provided in the graph below, please answer all of the following q

ID: 1190057 • Letter: U

Question

Using the data provided in the graph below, please answer all of the following questions:

Import Tariff Levied by a Small Country

- In the absence of trade, how many calculators does Mexico produce and consume?

- In the absence of trade, how much is Consumer Surplus in Mexico? How much is Producer Surplus?

- With free trade, how many calculators does Mexico import?

- With a per unit tariff of $3, what is the quantity of imports?

- What is the loss in consumer surplus due to the tariff?

- As a result of the tariff, what is the Revenue effect? Redistribution effect? Deadweight loss?

- Why does the overall welfare of a small country decline as the result of a tariff?

14 8 0 Pocket Galrnamre 10 40 ” 80 110

1. In the absence of trade, how many calculators does Mexico produce and consume?

60 pcket calculators are produced and consumed in the market.

2. In the absence of trade, how much is Consumer Surplus in Mexico? How much is Producer Surplus?

CONSUMER SURPLUS =1/2*(14-8)*60 = 180

PRODUCER SURPLUS = 1/2*(8-2)*60 = 180

3. With free trade, how many calculators does Mexico import?

The calculators imported with free trade will be 110-10=100

4. With a per unit tariff of $3, what is the quantity of imports?

With tariff of $3, the price will be 6 and the demand is 80 and supply is 40, the shortage of 40 units will be imported.

5. What is the loss in consumer surplus due to the tariff?

CS before Tariff = 1/2*(14-3)*110 = 605

CS after tariff =1/2*(14-6)*80 = 320

Loss in CS = 605-320 = 285

6. As a result of the tariff, what is the Revenue effect? Redistribution effect? Deadweight loss?

Revenue Effect (Revenue earned from tariff by the Govt) = (80-40)*(6-3)= 120

Redistribution effect (the revenue transferred to govt )= (80-40)*(6-3)= 120

Deadweight loss = 1/2*(40-10)*(6-3) + 1/2*(110-80)*(6-3)= 90

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