Question

The domestic supply and demand curves for hula beans are as follows:

Supply: P = 50 + Q Demand: P = 200 - 2Q

where P is the price in cents per pound and Q is the quantity in millions of pounds. The U.S. is a small producer in the world hula bean market, where the current price (which will not be affected by anything we do) is 60 cents per pound. Congress is considering a tariff of 40 cents per pound. Find the domestic price of hula beans that will result if the tariff is imposed. Also compute the dollar gain or loss to domestic consumers, domestic producers, and government revenue from the tariff.

Answer 1

Equilibrium occurs where Demand is equal to supply.

50+Q=200-2Q

Q*= 150/3= 50

Equilibrium Quantity=50 million pounds.

Equilibrium price P*= 50+50= 100 cents or $1.

World market price is 60 cents.

At this price

Domestic supply= 60=50+Q

Qs= 10

Domestic demand=60= 200-2Q

Qd= 70

If there is a tariff of 40 cent, effective price is 60 cents+40 cents= 100 cents.

This is the equilibrium domestic price. At 100 cents, Domestic producers satisfy domestic demand and imports are zero.

Before tariff, consumer surplus is area A+B+C.

Consumer surplus=0.5*(200-60)*70= 4900 million cents= $49 million

After tariff, consumer surplus is area A.

Consumer surplus=0.5*(200-100)*50= $25 million

So, loss of $49 million-$25 million= $24 million.

Producer surplus will increase by area B.

Producer surplus=0.5*(100-60)*(50-10)+ (100-60)*10= $12 million

After tariff, import is zero. So no tax revenue is collected.