A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: $$\begin{array} { l l }
\text { World price of wine (free trade): } & \$ 20 \text { per bottle } \
\text { Domestic production (free trade): } & 500,000 \text { bottles } \
\text { Domestic production (after tariff): } & 600,000 \text { bottles } \
\text { Domestic consumption (free trade): } & 750,000 \text { bottles } \
\text { Domestic consumption (after tariff): } & 650,000 \text { bottles }
\end{array}$$ The imposition of the tariff on wine will cause the surplus of the domestic producers to _____ by _____.
A)rise; $1 million
B)rise; $500,000
C)fall; $2.5 million
D)rise; $2.75 million

Question

A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: $$\begin{array} { l l } 
\text { World price of wine (free trade): } & \$ 20 \text { per bottle } \
\text { Domestic production (free trade): } & 500,000 \text { bottles } \
\text { Domestic production (after tariff): } & 600,000 \text { bottles } \
\text { Domestic consumption (free trade): } & 750,000 \text { bottles } \
\text { Domestic consumption (after tariff): } & 650,000 \text { bottles }
\end{array}$$ The imposition of the tariff on wine will cause the surplus of the domestic producers to _____ by _____.
A)rise; $1 million
B)rise; $500,000
C)fall; $2.5 million
D)rise; $2.75 million

Quizplus · Accepted Answer

The tariff increases the domestic price of wine to $25 per bottle ($20 + $5 tariff), encouraging domestic production to rise from 500,000 to 600,000 bottles. This increase in production (100,000 bottles) at the higher price results in an increase in producer surplus. Additionally, the tariff revenue (100,000 bottles not imported due to reduced consumption from 750,000 to 650,000, times the $5 tariff) adds to the surplus, totaling an increase of $2.75 million.

A Small Country Is Considering Imposing a Tariff on Imported