Given the information on prices, production, and consumption in Question #15 above, and assuming that demand and supply curves are straight lines, what is the gain in producer surplus in country B that occurs because of the imposition of the tariff?

Question

Quizplus · Accepted Answer

To calculate the gain in producer surplus in country B, we need to first find the new equilibrium price (after the tariff is imposed) and then compare it to the old equilibrium price.

Step 1: Find the new equilibrium price

- With no tariff, the equilibrium price is $6 (where demand and supply intersect). 
- With a $2 tariff, the domestic price in country B increases by $2 to $8. At this price, the quantity demanded in country B decreases to 12 units and the quantity supplied in country B increases to 18 units. 
- Therefore, the new equilibrium price is where the quantity demanded (12) equals the quantity supplied (18), which occurs at a price of $7.

Step 2: Calculate the gain in producer surplus in country B

- Without the tariff, producer surplus in country B is the area above the supply curve and below the old equilibrium price of $6, up to the point where quantity supplied equals 6 (the amount consumed in country B before the tariff). This area is a triangle with height $6 and base 6 units wide, so its area is (1/2) x 6 x $6 = $18. 
- With the tariff, producer surplus in country B is the area above the supply curve and below the new equilibrium price of $7, up to the point where quantity supplied equals 18 (the amount produced in country B after the tariff). This area is a trapezoid with height $6, a top width of 6 units (the point where quantity supplied equals 6), and a bottom width of 18 units (the point where quantity supplied equals 18). The area of this trapezoid is (1/2)(6+7) x (18-6) = $72. 
- Therefore, the gain in producer surplus in country B is $72 - $18 = $54. However, this calculation only takes into account the surplus gained by domestic producers. We also need to subtract the amount of the tariff revenue collected by the government in country B, which is $2 per unit on 18 units, or $36. 
- The net gain in producer surplus in country B is therefore $54 - $36 = $18. But we are asked for the total gain, so we also need to consider the surplus gained by foreign producers, which is $330 - $140 = $190. 
- Finally, the total gain in producer surplus (domestic and foreign) is $18 + $190 = $208, which is closest to answer choice C ($348)

Given the Information on Prices, Production, and Consumption in Question