Question

XXX produces onions that it exports to the world. It institutes an export tariff. Assume the initial price is $12.40 per bushel in world markets. Assume the export tariff was $6.25. Before the tariff, Indian consumption was is 11 million bushels and production is 15 million bushels. After the export tariff, Indian consumption was 12.75 million bushels and production is 13.5 million bushels. (a) Calculate the deadweight loss for the country? (b) Calculate the gain/loss to producers?

The answer for a is 10.156,250 M and the answer for b is -89.0625 M. Please help me with providing steps and graphs to solve this problem!! GRAPH, please!!

Answer 1

Answer:
The effect of tariff is illustrated in the graph below: ( graph not to scale, for illustration only.)

When tariff is imposed, price decreases to 6.15. As a result of decrease in price, consumption increases and production deceases.  

  

a) Deadweight loss = $10.15625 million

Deadweight loss is seen in triangles a+b.

Ares of a = ½*(12.40-6.15)*(12.75-11) => ½*6.25*1.75 = 5.46875

Area of b = ½*(12.40-6.15)*15-13.5) => ½*6.25*1.5 = 4.6875  

Total deadweight loss = area of a+area of b = 5.46875 + 4.6875   = 10.15625   

b) Loss in producer surplus = $89.0625 million

Panel (i) represents producer surplus before tariff. Panel (ii) represents producer surplus after tariff. The loss in producer surplus = area of a+b+c in panel (ii).

This can be claculated as area of (a+b+c+d) - area of d

So, Loss in producer surplus = (6.25*15) - (½*6.25*1.5) = 93.75 - 4.6875 = $89.0625 million.