Scenario: The following figure shows the demand curve, D, and the supply curve, S, of chairs in Barylia. Barylia is open to free trade. The world price of chairs is $3, and the government of Barylia decides to impose a $1 tariff on the import of chairs.

-Refer to the scenario above.Calculate the total surplus in Barylia under free trade.

Question

Scenario: The following figure shows the demand curve, D, and the supply curve, S, of chairs in Barylia. Barylia is open to free trade. The world price of chairs is $3, and the government of Barylia decides to impose a $1 tariff on the import of chairs.
 
-Refer to the scenario above.Calculate the total surplus in Barylia under free trade.

Quizplus · Accepted Answer

Under free trade, the equilibrium price in Barylia would be $3, which is the same as the world price. At this price, the quantity demanded is 100 and the quantity supplied is 50.

Consumer surplus = $(5-$3) x 100 / 2 = $100
Producer surplus = $(3-$1) x 50 = $100

Total surplus = consumer surplus + producer surplus = $100 + $100 = $200

Therefore, the correct answer is B, $250, since a $1 tariff on imports reduces the quantity of imports and shifts the supply curve leftward, causing an increase in the domestic price of chairs. The government collects revenue from the tariff, but the total surplus in the market decreases as a result of the tariff.

Scenario: the Following Figure Shows the Demand Curve, D, and the Supply