Suppose the domestic demand for turnips is P = 100

Question

Suppose the domestic demand for turnips is P = 100 - Q. The domestic supply of turnips is P = 10 + Q. The world price is $30 per unit. If the tax on import is $10 unit, the total tax-collections from imports will be:

Quizplus · Accepted Answer

The domestic demand equation is P = 100 - Q, and the domestic supply equation is P = 10 + Q. At the world price of $30, without any tax, the domestic demand would be 100 - 30 = 70 units, and the domestic supply would be 30 - 10 = 20 units, leading to an import requirement of 50 units to balance supply and demand. With a $10 tax on imports, the price for imports rises to $40. This reduces the demand to 100 - 40 = 60 units and increases the supply to 40 - 10 = 30 units, leading to an import requirement of 30 units. The total tax collection is the tax per unit ($10) times the number of imported units (30), which equals $300.