Question

Use the following information on the supply and demand for oil in the hypothetical country Olympus to answer the questions below. Assume that the demand and supply curves are linear.  

              Domestic           Domestic

Price ($)      Demand             Supply

60             460                 280

80             440                 320

100             420                 360

120             400                 400

140             380                 440

1. Assume that the world price of oil is $80 per barrel. Assume that Olympus is a small country and that Olympus imposes a $20 per barrel tariff on imported oil. Calculate the effect of the tariff on

a. The change in producer surplus

b. The change in consumer surplus

c. Government tariff revenue

d. Consumption distortion loss

Answer 1

The consumer surplus is the area below the demand curve and above the price line and the producer surplus is the area above the supply curve and below the price line. Below the consumer surplus with and without tariff is given below.

Consumer surplus

  .

Producer surplus

  .

Consumer surplus

.

Producer surplus

.

Government revenue

Dead weight loss.