The figure given below shows the national market for mopeds in a country. D_dand S_d are the domestic demand and supply curves of mopeds respectively. Calculate the welfare loss arising from the production effect of the tariff. A)$14 million B)$2.5 million C)$5 million D)$7.5 million

Question

Quizplus · Accepted Answer

The production effect of the tariff can be seen as a reduction in domestic supply, which leads to a higher domestic price and a lower quantity consumed. The new equilibrium price is P2 and the quantity traded is Q2 - Q1. The welfare loss arising from the production effect of the tariff is the shaded area A + B, which represents the deadweight loss.

To calculate the welfare loss, we can use the formula:
Welfare loss = 0.5 * (P2 - P1) * (Q2 - Q1)

Using the values in the graph, we get:
Welfare loss = 0.5 * ($300 - $250) * (5 million - 3 million)
Welfare loss = $2.5 million

Therefore, the best choice is B.

The Figure Given Below Shows the National Market for Mopeds