Question

Assume Australia is a small nation and thus unable to influence world price. Its demand and supply schedules for TV sets are shown in the following table.

Price of TV sets	Quantity demanded	Quantity supplied
$500	0	50
400	10	40
300	20	30
250	25	25
200	30	20
100	40	10
0	50	0

To protect its producers from foreign competition suppose the Australian government levies a specific tariff of $100 on imported TV sets.

a) Determine and show graphically the effects of the tariff on the price of TV sets in Australia, the quantity of TV sets produced by Australian producers, the quantity of TV sets purchased by Australian consumers, and the volume of imports

b) Calculate the reduction in Australian consumer surplus and increase in Australian producer surplus because of the tariff.

c) What is the amount of deadweight loss in the Australian economy because of the tariff? Please explain and type out work, hard for me to read hand written. thank you!

Answer 1

a) The equilibrium is at point A or $250. The quantity demanded = 25.

Consumer surplus = area a = $250 x 25 x 0.5 = $3,125

Producer surplus = area b = $250 x 25 x 0.5 = $3,125

b) With free trade at $100, 40 units are consumed, 10 are supplied domestically and 30 are imported.

Consumer surplus = area a = $400 x 40 x 0.5 = $8,000

Producer surplus = area b = $100 x 10 x 0.5 = $500

c) With $100 tariff, 30 units are consumed, 20 units are supplied domestically, and 10 units are imported.

Consumer surplus = the big green trianlge = $300 x 30 x 0.5= $4,500

Consumer surplus before tariffs was $8,000 so the reduction = $8,000 - $4,500 = $3,500

Area a = redistributive effect = $100 x 10 + $100 x 10 x 0.5 = $1,500

Area b = protective effect = $100 x 10 x 0.5 =$500

Area c = revenue effect = $100 x $10 = $1,000

Area d = consumption effect = $100 x $10 x 0.5 =$500