-Refer to Exhibit 34-3.The world price is P_W.If a tariff is imposed the price rises to P_W + T.Because of the tariff,consumers' surplus is reduced by an amount equal to the area of

Question

-Refer to Exhibit 34-3.The world price is P<sub>W</sub>.If a tariff is imposed the price rises to P<sub>W</sub> + T.Because of the tariff,consumers' surplus is reduced by an amount equal to the area of A) 1 + 2 + 3. B) 1 + 2. C) 1 + 2 + 3 + 4. D) 3 + 4. E) 2 + 3 + 4.

Quizplus · Accepted Answer

When a tariff is imposed, the domestic price of the imported good increases from the world price to the world price plus the tariff. This results in a decrease in consumer surplus, which is represented by the area under the demand curve and above the price level. The reduction in consumer surplus due to the tariff includes the areas representing the increased payments for the goods still purchased (1+2), the tariff revenue (3), and the deadweight loss due to decreased consumption (4). Therefore, the total reduction in consumer surplus is represented by the sum of these areas: 1 + 2 + 3 + 4.