QUESTION9 This figure shows demand and supply for a product in country A, which

Question

QUESTION9 This figure shows demand and supply for a product in country A, which is interested in engaging in international trade. The import price from country B is $3 and from country C is $4. Country A imposes a fixed tariff of $2 per unit of import. Answer the following questions based on these assumptions. PriceDemand Supply 0 Based on information provided in the figure above, if country A decides to import from the low-cost country, the tariff revenue can be measured by the area: a. IHPQ O b. IHVU c.UVPQ d. GHPE

Explanation / Answer

9. The right answer is a. IHPQ

Explanation: When the effective price is $5 ($3 import price + $2 tariff), gap between domestic demand and supply is IH. This is the amount which will be imported. Also, tariff is $2, which equals IQ. Therefore, the area of the rectangle IHPQ represents the tariff revenue of the government.

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