The figure below shows the demand (D) and supply (S) curves of a good produced domestically in an economy as well as traded in the international market.?Figure 20.1??In the figure,?P₁: Price of the good in the international market.?P₂: Price of the good in the domestic market after the imposition of tariff by the government.?P₃: No-trade price of the good in the domestic market.

-Refer to Figure 20.1. If the government imposes a tariff such that the price of the good in the domestic market is P₂ when the international price is P₁:

Question

The figure below shows the demand (D) and supply (S) curves of a good produced domestically in an economy as well as traded in the international market.?Figure 20.1??In the figure,?P₁: Price of the good in the international market.?P₂: Price of the good in the domestic market after the imposition of tariff by the government.?P₃: No-trade price of the good in the domestic market.
 
-Refer to Figure 20.1. If the government imposes a tariff such that the price of the good in the domestic market is P₂ when the international price is P₁:

Quizplus · Accepted Answer

When a tariff is imposed by the government, the domestic price of the good rises to P2, which is higher than the international price of P1. As a result, the domestic consumers reduce their demand to Q2 and the domestic producers increase their supply to Q3. The new quantity demanded and supplied corresponds to point R, which is the intersection of the new demand and supply curves. Now, the quantity of the good imported by the domestic country is Q4 - Q3 units, and the quantity exported is Q1 - Q5 units. As the domestic price has increased due to the tariff, the demand for imports goes down, resulting in a decline in the quantity of the good imported by the domestic country. Therefore, the correct answer is B, the import of the good by the domestic country declines.

The Figure Below Shows the Demand (D) and Supply (S)