Refer to Figure 7-4. Suppose the U.S. government imposes a $0.25 per pound tariff on rice imports. Figure 7-4 shows the demand and supply curves for rice and the impact of this tariff. Use the figure to answer questions a-i
a. Following the imposition of the tariff, what is the price that domestic consumers must now pay and what is the quantity purchased?
b. Calculate the value of consumer surplus with the tariff in place.
c. What is the quantity supplied by domestic rice growers with the tariff in place?
d. Calculate the value of producer surplus received by U.S. rice growers with the tariff in place.
e. What is the quantity of rice imported with the tariff in place?
f. What is the amount of tariff revenue collected by the government?
g. The tariff has reduced consumer surplus. Calculate the loss in consumer surplus due to the tariff.
h. What portion of the consumer surplus loss is redistributed to domestic producers? To the government?
i. Calculate the deadweight loss due to the tariff.
a. Price = $1.00 per pound; Quantity purchased = 16 million pounds
b. Consumer surplus = 1/2 × 16 million × $1 = $8 million
c. Quantity supplied by domestic producers = 8 million pounds
d. Producer surplus to rice growers = 1/2 × 8 million × $0.75 = $3 million
e. Quantity imported = 8 million pounds
f. Tariff revenue collected by the government = $0.25 × 8 million = $2 million
g. Loss in consumer surplus due to the tariff = 16 million × $0.25 + 1/2 × 4 million × $0.25 = $4.5 million
h. Amount redistributed to domestic producers = 5 million × $0.25 + 1/2 × 3 million × $0.25 = $1.625 million
Amount redistributed to the government = 8 million × $0.25 = $2 million
i. Deadweight loss due to the tariff = 1/2 × 4 million × $0.25 + 1/2 × 3 million × $0.25 = $875,000
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a. Total output will decline as more workers are hired. b. In the long run, average total cost will eventually decline as output is expanded. c. In the short run, expansion of output will eventually lead to increases in marginal cost and average total cost. d. A doubling of all inputs will lead to more than a doubling of output.
Answer the following questions true (T) or false (F)
1. Economic efficiency is a market outcome in which the marginal benefit to consumers is equal to the marginal cost of production and the sum of consumer surplus and producer surplus is maximized. 2. If marginal benefit is greater than marginal cost, output is inefficiently high. 3. Deadweight loss refers to the reduction in economic surplus resulting from a market not being in competitive equilibrium.