The accompanying table gives domestic supply and demand schedules for a product. Suppose that the world price of the product is $1. $\begin{array}{|c|c|c|}
\hline\text { Ouantity }&&\text { Ouantity }\
(\text { Supplied }&&\text { Demanded }\
\hline \text { (Domestic) } & \text { Price } & \text { (Domestic) } \
\hline 12 & \$ 5 & 2 \
\hline 10 & 4 & 4 \
\hline 7 & 3 & 7 \
\hline 4 & 2 & 11 \
\hline 1 & 1 & 16 \
\hline
\end{array}$ The total amount of revenue collected from a $1-per-unit tariff on this product will be

Question

Quizplus · Accepted Answer

With a world price of $1, the domestic price without a tariff is also $1. At this price, the quantity demanded is 16 and the quantity supplied is 1, resulting in a shortage of 15 units.

When a $1-per-unit tariff is imposed, the domestic price increases to $2 ($1 + $1 tariff). At this price, the quantity supplied increases to 4 while the quantity demanded decreases to 11, resulting in a surplus of 7 units.

The government collects revenue from the tariff equal to the tariff rate times the quantity of imports, which is 7 units in this case. Therefore, the total amount of revenue collected is 7 x $1 = $7.

Note that the consumer surplus decreases by $9 (the difference between the consumer surplus without the tariff and the consumer surplus with the tariff) and the producer surplus increases by $14 (the difference between the producer surplus with the tariff and the producer surplus without the tariff), resulting in a net increase in total surplus of $5 ($14 - $9). However, the question is asking only for the total revenue collected from the tariff, which is $7.

The Accompanying Table Gives Domestic Supply and Demand Schedules for a Product