Question

1. You are given the following information about copper in the United States:

	Situation with Tariff	Situation without tariff
World Price	$0.40 per pound	$0.50 per pound
Tariff	$0.20 per pound	0
US Domestic Price	$0.60 per pound	$0.50 per pound
US Consumption	210 million pounds	250 million pounds
US Production	140 million pounds	100 million pounds

INCLUDE CALCULATIONS FOR THE FOLLOWING: (Please)

a. Calculate the loss to US consumers of copper from imposing the tariff.
b. Calculate the gain to US producers of copper from imposing the tariff.
c. Calculate the gain in tariff revenue to the US government from imposing the tariff.
d. Calculate the net gain or loss to the US economy as a whole from imposing the tariff.

Answer 1

Answer:

1) Solution: 23 million

Working: Due to tariff the domestic price increases by $0.10 (= $0.60 - $0.50) per pound. Consumers consume 40 million (=250-210) pounds less. The consumption effect eqails $2 million (= ½ x $0.10 x 40 million). Consumers lose an additional $21 million (= $0.10 x 210 million) because of the higher price that they paid for their consumption after the tariff is imposed.

2) Solution: 12 million

Working: The producers in U.S. charge $0.10 more per pound and expand the production by 40 million pounds. The producer surplus gain from expanding the production quantity equals $2 million (= ½ x $0.10 x 40 million). The gain from selling the production quantity they used to sell before the tariff equals $10 million (100 million x $0.10).

3) Solution: $14 million

Working: After imposition of the tariff the U.S. imports 70 million (=210-140) pounds. The revenue equals $14 million (=$0.20 x 70 million)

4) Solution: $3 million

Working: Net gain = government revenue - consumer loss + producer gain = $14 million - $23 million + $12 million = $3 million