Question

1. In the market for coffee, demand is given by Q = 10 - P, and supply is given by Q = P, where Q represents tonnes of coffee per year. Suppose that the world price is $6. The government has decided to impose an import tariff of $1 per ton of coffee per year. Which of the following is true?

1. Consumer surplus will decrease
2. Producer surplus will increase
3. Total surplus will decrease
4. All of the above
5. None of the above

2. In the market for tea, quantity demanded is given by Q = 5 - P/2, and quantity supplied is given by Q = P/2, where Q represents tonnes of tea per year. Suppose that the world price of tea is $2. The government has decided to impose an import quota of 1 tonne of tea per year. Which of the following is true?

1. The domestic price will be higher than the world price
2. Relative to the free trade equilibrium, total surplus in the domestic market will decrease
3. Relative to the free trade equilibrium, producer surplus will decrease
4. Both A and B are correct
5. None is correct.

Answer 1

E. The price in the domestic market is $5. World price is $6 which implies that the nation will actually export and not import coffee. Hence the effect of import tariff will not be considered in this market because there is no import.

D. Since market price in the domestic economy is $5 and the world price is $2, the country will import. Import quota in this case will increase the domestic price reduce consumer surplus and increase producer surplus. There will be a dead weight loss also.