Under free trade, a large country produces 1 million leather bags per year and imports another 2 million bags per year at the world price of $60 per bag. Assume that the country imposes a specific tariff of $5 per bag. As a result, the per-unit price of leather bags decreases to $58 in the international market and the import of leather bags drops to 1.6 million. The domestic production, on the other hand, increases to 1.1 million. Following the imposition of the tariff, the domestic consumers pay a price of _____ for each bag.

Question

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Before the imposition of the tariff:
Domestic production = 1 million bags
Imports = 2 million bags
World price = $60 per bag

After the imposition of the tariff:
Domestic production = 1.1 million bags
Imports = 1.6 million bags
World price = $58 per bag
Tariff = $5 per bag

The domestic price of leather bags after the imposition of the tariff can be calculated as follows:
Total supply = Domestic production + Imports
Total supply = 1.1 million + 1.6 million
Total supply = 2.7 million bags

The revenue generated from the tariff can be calculated as follows:
Tariff revenue = Tariff per unit * Units imported
Tariff revenue = $5 * 1.6 million
Tariff revenue = $8 million

The domestic price of leather bags can be calculated as follows:
Total cost of domestic production = Domestic production * Domestic cost per unit
Total cost of domestic production = 1.1 million * Cost per unit
Total cost of domestic production = 1.1 million * $63
Total cost of domestic production = $69.3 million

Total cost of imports = Imports * (World price + Tariff per unit)
Total cost of imports = 1.6 million * ($58 + $5)
Total cost of imports = $105.6 million

Total cost of all leather bags = Total cost of domestic production + Total cost of imports + Tariff revenue
Total cost of all leather bags = $69.3 million + $105.6 million + $8 million
Total cost of all leather bags = $182.9 million

Domestic price per unit = Total cost of all leather bags / Total supply
Domestic price per unit = $182.9 million / 2.7 million bags
Domestic price per unit = $67.74

However, this is the price WITHOUT the tariff. To find the domestic price WITH the tariff, we need to add the tariff per unit to the domestic price:
Domestic price per unit WITH tariff = Domestic price per unit + Tariff per unit
Domestic price per unit WITH tariff = $67.74 + $5
Domestic price per unit WITH tariff = $72.74

Therefore, the domestic consumers pay a price of $63 for each bag.

Under Free Trade, a Large Country Produces 1 Million Leather