Price Quantity Supplied Quantity Demanded (dollars per pound) (thousands of poun

Question

Price                                     Quantity Supplied                        Quantity Demanded

(dollars per pound)       (thousands of pounds per year)        (thousands of pounds per year)   

21                                              120                                           60

18                                              100                                          100

15                                              80                                            140

12                                              60                                            180

9                                                40                                            220

1) The United States imports cheese from a variety of countries. The table above gives the domestic supply
of, and demand for, cheese in the United States. The world price of cheese is $12 per pound, and trade is
unrestricted.
a) How many pounds of cheese are consumed in the United States?
b) How many pounds of cheese are produced in the United States?
c) How many pounds of cheese are imported into the United States?
If a $3 per pound tariff is imposed,
d) How many pounds of cheese are consumed in the United States?
e ) How many pounds of cheese are produced in the United States?
f) How many pounds of cheese are imported into the United States?
g) How much will the U.S. government collect in tariff revenue?
h) Who benefits from the tariff? Who loses

Explanation / Answer

If trade is unrestricted, the domestic price is (assumed to be) the world price. a) The quantity demanded at the world price is then the quantity consumed. b) Similarly the quantity supplied at this price is the quantity produced domestically. c) The difference between the quantity supplied and the quantity demanded at this price is the amount of cheese that is imported (q demanded-q supplied = q imported). If a $3 tariff is imposed, that moves the price from the world price of $12 to a new price of $15. d),e),f) Using the same methods for a), b) and c) as above for this new price you can determine the quantities consumed, produced and imported into the US. g) the amount of tariff revenue is the amount of the tariff multiplied by the amount of cheese that is imported. h) it should be easy to determine who is better and worse off after the tariff. The government gains the revenue, domestic cheese suppliers receive a higher price, but also sell a lower quantity (if you take each price -$12 and $15 and multiply it by the quantities supplied at those prices, you can find the domestic revenue, if the revenue after the tariff is higher than it was before, domestic producers benefit, if its lower, they "lose"), consumers are obviously worse off, they pay more and get less cheese. Hope that helps

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