wingdings as possible at the world price. Now, the government succumbs to lobbyi
ID: 1232476 • Letter: W
Question
wingdings as possible at the world price. Now, the government succumbs to lobbying by wingding producers and imposes a protective tariff on wingdings amounting to $2 per wingding. The graph below represents this situation. Answer the following questions. Use formulas and show calculations as well as final answers. Does the United States have a comparative advantage in wingdings? Explain. Discuss the effect of the tariff on the number of imports.. How did the imposition of the tariff change consumer surplus? How did the imposition of the tariff change producer surplus? What is the overall result of the tariff in terms of welfare?Explanation / Answer
A. The U.S. does not have a comparative advantage in wingdings because the world price is below their equilibrium domestic price of $10. This means that it is cheaper to import wingdings form the rest of the world than it is to produce wingdings domestically. If the U.S. had a comparative advantage in wingdings, they would be export wingdings to the rest of the world, because trade according to comparative advantage is such that the country with a comparative advantage in a certain good will specialize in and export that good. B. The tariff decreases the import from 20 at the world price (the quantity demanded is 26, the domestic supply is 6, so the shortage is all imported) to 6 after the tariff (the price increases from $6 to $8 for someone to buy a wingding in the U.S., which means the quantity demanded domestically is now 18 and the quantity supplied domestically is 12, which is only a shortage of 6 units that needs to be supplied). C. The tariff decreased consumer surplus by the trapezoidal area with height (8-6) and base #1 = 26 and base #2= 18. The area of this can be simply calculated by splitting the trapezoid into a rectangle and a triangle. The rectangle has an area of (8-6)*18=36 and the triangle has an area of (1/2)*(26-18)*2=8. Adding the two, we see that consumer surplus went down by 44. D. Producer surplus increased after the tariff, by the trapezoid area with height (8-6) and base #1=6 and base#2=12. The area of a trapezoid is just [(b1+b2)/2]*h, so that's just [(6+12)/2]*(8-6)=[18/2]*2=18. So, producer surplus goes up by 18. E. The tariff will lead to deadweight loss, which means that total welfare will be smaller than it was before the tariff. We can actually find out by how much just by seeing that consumer surplus went down by 44, and 18 of that went to the producers. The tariff will generate revenue for the government, which is just $2 tariff per unit times 6 units being "tariff'd", which is $12. So, out of the 44 units that the consumer lost, 18 went to the producers, 12 went to the government, which leaves 14 units unaccounted for - this is the deadweight loss (i.e. total surplus went down by 14 units after the tariff was imposed). You could also just find the areas of the two triangles next to the government revenue area to get the same thing.
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