The following image shows the market for wheat for the country of Palatino. S^D is the domestic supply of wheat, and D^D is the domestic demand for wheat. Suppose the world price of wheat is $9 per bushel of wheat. Suppose a specific tariff of $6 is imposed on each bushel of wheat imported. Government revenue from the tariff equals:

Question

The following image shows the market for wheat for the country of Palatino. S<sup>D</sup> is the domestic supply of wheat, and D<sup>D</sup> is the domestic demand for wheat. Suppose the world price of wheat is $9 per bushel of wheat. Suppose a specific tariff of $6 is imposed on each bushel of wheat imported. Government revenue from the tariff equals: A) $45,000. B) $3,000,000. C) $1,800,000. D) $900,000. E) $50,000.

Quizplus · Accepted Answer

To find the government revenue from the tariff, we need to first find the quantity of imported wheat. At a world price of $9 per bushel, the quantity demanded domestically is QS1 = 20,000 bushels and the quantity supplied domestically is QD1 = 10,000 bushels. The difference between these quantities is the quantity of wheat that needs to be imported: QM = QS1 - QD1 = 10,000 bushels.

With a specific tariff of $6 per bushel, the price of imported wheat will be $9 + $6 = $15 per bushel. At this price, the quantity of wheat demanded domestically is QD2 = 15,000 - 5,000P. To find QD2, we substitute $15 for P and solve for QD2:

QD2 = 15,000 - 5,000($15) = 7,500 bushels

Therefore, the quantity of wheat imported is QM = 10,000 bushels and the government revenue from the tariff is:

Government revenue = tariff x quantity imported = $6 x 10,000 bushels = $60,000

However, this is in Palatino's currency. To convert to US dollars, we need to multiply by the exchange rate, which is given as $30 per unit of Palatino's currency:

Government revenue in US dollars = $60,000 x $30/Palatino dollar = $1,800,000

Therefore, the answer is C, $1,800,000.

The Following Image Shows the Market for Wheat for the Country