A small country imports steel with a world price of $900 a ton. The domestic ind
ID: 1110424 • Letter: A
Question
A small country imports steel with a world price of $900 a ton. The domestic industry is composed of numerous small firms who together have a supply function Q = 200P/3. The domestic demand function is Q = 400,000 – 200P. The government is considering imposing a tariff of $300 per ton. a. What are consumption, production, imports, and price with no tariff? b. With a tariff, calculate consumption, production, imports, domestic price, and tariff revenues? c. How much will consumer and producer surplus and deadweight loss change if the tariff is imposed? d. Each domestic steel worker can make 100 tons of steel in a year. How many jobs will be created by imposing the tariff? e. What is the cost in deadweight loss per job created? f. What is the lost consumer surplus per job created? g. If a quota is substituted for the $300 tariff, what size quota will leave prices unchanged from what they would be with the tariff? h. Draw and label a diagram that shows prices and quantities.
Explanation / Answer
(a) With no tariff, domestic price (P) = 900
Quantity demanded = 400,000 - (900 x 200) = 400,000 - 180,000 = 220,000
Quantity supplied = 200 x 900 / 3 = 60,000
Import = 220,000 - 60,000 = 160,000
(b) With tariff, domestic price = 900 + 300 = 1,200
Quantity demanded = 400,000 - (1,200 x 200) = 400,000 - 240,000 = 160,000
Quantity supplied = 200 x 1,200 / 3 = 80,000
Imports = 160,000 - 80,000 = 80,000
Tariff revenue = Unit tariff x Import = 300 x 80,000 = 24,000,000
(c)
From demand function, when Q = 0, P = 2,000
Consumer surplus (CS) = Area between demand curve & price
Before tariff, CS = (1/2) x (2,000 - 900) x 220,000 = (1/2) x 1,100 x 220,000 = 121,000,000
After tariff, CS = (1/2) x (2,000 - 1,200) x 160,000 = (1/2) x 800 x 160,000 = 64,000,000
Decrease in CS = 121,000,000 - 64,000,000 = 57,000,000
From supply function, when Q = 0, P = 0
Producer surplus (PS) = Area between supply curve & price
Before tariff, PS = (1/2) x 900 x 60,000 = 27,000,000
After tariff, PS = (1/2) x 1,200 x 80,000 = 48,000,000
Increase in PS = 48,000,000 - 27,000,000 = 21,000,000
(d) With tariff, quantity supplied increases by (80,000 - 60,000) = 20,000.
Jobs created = Increase in quantity supplied / 100 = 20,000 / 100 = 200