Question

Given the following demand and supply curves for a product that is produced in two countries, one labelled Home and the other Foreign. The Home country imports the product from the Foreign country.

The information for the Home country:

Quantity demanded is:      QD1=20-10p

Quantity supplied is:         QS1=-5+20P

And the following information for the Foreign country:

Quantity demanded is:      QD2=15-35P

Quantity supplied is:         QS2=-20+5P

1. The home country imposes a specific import tariff of $13 per unit. Calculate the welfare impact of the tariff on the home country.

Answer 1

Social loss = 1/2 * [272.5-12.5]*13+1/2*[11.25-(-118.75)]*13

=13/2 [ 260+130]

= 13/2 * 390

= $2,535

Explanation:

Equilibrium level in the domestic country,

Quantity demanded is:     QD1=20-10p

Quantity supplied is:         QS1=-5+20P

Qd = Qs

20-10P = -5+20P

25 = 30P

P = 25/30 = 5/6

Q = 20-10P

Q = 20-10*5/6

= 20-25/3

= 35/3

Equilibrium level in the foreign country,

Quantity demanded is:      QD2=15-35P

Quantity supplied is:         QS2=-20+5P

Qd = Qs

15-35P = -20+5P

35 = 40P

P = 7/8

Q = 15-35P

Q = 15-3*7/8

= 15-21/8

= 99/8

Tariff = $13 per unit

Price(​world+tariff) = (7/8) + 13

= 111/8

= $13.875

Domestic Quantity supplied at P(​w+t) = -5+20P

= -5+20*13.875

= 272.5

Domestic Quantity supplied at Pw​ = -5+20*0.875

= -5+ 17.5

= 12.5

Domestic demand at P(​w+t) = 20-10P

= 20-10*13.875

= 20-138.75

= -118.75

Domestic demand at Pw​ = 20-10*0.875

= 20-8.75

= 11.25

Social loss = 1/2 * [272.5-12.5]*13+1/2*[11.25-(-118.75)]*13

=13/2 [ 260+130]

= 13/2 * 390

= $2,535