Question

In: Economics

Consider the world market for computers between the U.S. and China. Let the demand for computers...

Consider the world market for computers between the U.S. and China. Let the demand for computers in the U.S. be Du = 3500-2P and in China be Dc = 1800 - 3P. Let the supply of computers in the U.S. be Q u = 500 +P and in China be Qc = 200+2p

Suppose now that the importing country wants to impose an import tariff of $200 per computer. If this tariff is enacted, how much will the consumers in the importing country pay per computer? please draw a graph.

If the $200 tariff is enacted, how much revenue will it generate?

Expert Solution

We determine the importing country as follows.

Setting Du = Qu in US,

3500 - 2P = 500 + P

3P = 3000

P = 1000

Q = 500 + 100 = 1500

Setting Dc = Qc in China,

1800 - 3P = 200 + 2P

5P = 1600

P = 320

Since price is lower in China, in this case China is exporting country and US is importing country. For US, relevant (world) price is 320.

After tariff, price rises to (320 + 200) = $520.

When P = 520,

Du = 3500 - 2 x 520 = 3500 - 1040 = 2460

Qu = 500 + 520 = 1020

Import = Du - Qu = 2460 - 1020 = 1440

Tariff revenue = $200 x 1440 = $288000

In following graph, AB & CD are domestic demand & supply curves for US.

Domestic equilibrium is at point E with price P1 (= 1000) & quantity Q1 (= 1500).

After trade, world price is P* (= 320) for which domestic consumption is Q2 and domestic production is Q3, therefore imports equal (Q2 - Q3).

The tariff will increase the price of the good, and domestic price rises to Pt (= 520) , at which domestic consumption is Q4 (= 2460) and domestic production is Q5 (= 1020), therefore imports equal (Q4 - Q5) (= 1440).

Tariff revenue = Area PtHLP*

Rahul Sunny answered 1 year ago

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