You are given the following information pertaining to large country B with respect to good W (which is produced at home and also imported), both under free trade and with a $10.00 import tariff in place:
$\begin{array}{lr}
\text { domestic price of W under free trade }&\$40\
\text {world price of W (i.e., price of W from rest-of-the}\
\text {world) under free trade}&\$40\
\text { domestic price of } \mathrm{W} \text { after imposition of tariff }&\$44\
\text {world price of W (i.e., price of W from rest-of-the}\
\text {world after imposition of tariff}&\$34\
\text { domestic production of W under free trade } & 80 \text { units } \
\text { domestic production of W after imposition of tariff } & 94 \text { units } \
\text { domestic consumption of W under free trade } & 120 \text { units } \
\text { domestic consumption of W after imposition of tariff } & 112 \text { units }
\end{array}$

Given this information, and assuming that demand and supply curves are straight lines, what is the loss of consumer surplus in country B that occurs because of the imposition of the tariff?

Question

You are given the following information pertaining to large country B with respect to good W (which is produced at home and also imported), both under free trade and with a $10.00 import tariff in place:
$\begin{array}{lr}
\text { domestic price of W under free trade }&\$40\
\text {world price of W (i.e., price of W from rest-of-the}\
\text {world) under free trade}&\$40\
\text { domestic price of } \mathrm{W} \text { after imposition of tariff }&\$44\
\text {world price of W (i.e., price of W from rest-of-the}\
\text {world after imposition of tariff}&\$34\
\text { domestic production of W under free trade } & 80 \text { units } \
\text { domestic production of W after imposition of tariff } & 94 \text { units } \
\text { domestic consumption of W under free trade } & 120 \text { units } \
\text { domestic consumption of W after imposition of tariff } & 112 \text { units }
\end{array}$
 
Given this information, and assuming that demand and supply curves are straight lines, what is the loss of consumer surplus in country B that occurs because of the imposition of the tariff?

Quizplus · Accepted Answer

The loss of consumer surplus due to the imposition of the tariff can be calculated by considering the change in the price of good W and the change in the quantity consumed. Under free trade, the domestic price of W is $40, and the domestic consumption is 120 units. After the imposition of the tariff, the domestic price increases to $44, and consumption decreases to 112 units. The loss in consumer surplus is the area of the trapezoid formed by these changes, calculated as the average of the bases (the change in price, $4, from $40 to $44) times the height (the change in quantity, from 120 to 112 units, which is 8 units). The formula for the area of a trapezoid is ((base1 + base2) / 2) * height, which in this case is (($4 + $4) / 2) * 8 = $32 * 8 = $256. However, this calculation only accounts for the direct loss due to higher prices and reduced consumption. The total loss of consumer surplus also includes the deadweight loss triangles due to reduced consumption and production inefficiencies. Given the information provided and typical economic analysis, the correct answer involves recognizing that the direct calculation does not fully capture the consumer surplus loss, and the actual answer must account for broader impacts, leading to a higher total loss, which is option D, $464. This includes both the direct loss and the additional deadweight losses from reduced market efficiency.

You Are Given the Following Information Pertaining to Large Country