Refer to Figure 7-4. Suppose the U.S. government imposes a 0.25 ...

[swpotter12]

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.

Question 2

Workers and firms both expect that prices will be 2.5 higher next year than they are this year. As a result,
 
  A) aggregate demand will increase by 2.5.
  B) the purchasing power of wages will rise if wages increase by 2.5.
  C) workers will be willing to take lower wages next year, but not lower than a 2.5 percent decrease.
  D) the short-run aggregate supply curve will shift to the left as wages increase.

[ngr69]

Answer to Question 1

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

Answer to Question 2

D