The graph above shows domestic supply and demand with trade in a SMALL country.With trade,this country can purchase at the world price,Pw.
Suppose that this country imposes a $5 per unit tariff on this good.Which of the following is true?
A)The domestic price will rise by $5.
B)Consumers will be better off.
C)There will not be deadweight losses due to this tariff, since it is a small country.
D)Producers will not increase domestic production.

Question

The graph above shows domestic supply and demand with trade in a SMALL country.With trade,this country can purchase at the world price,Pw.
Suppose that this country imposes a $5 per unit tariff on this good.Which of the following is true?
A)The domestic price will rise by $5. 
B)Consumers will be better off. 
C)There will not be deadweight losses due to this tariff, since it is a small country. 
D)Producers will not increase domestic production.

Quizplus · Accepted Answer

When the country imposes a $5 per unit tariff, the domestic price will rise by the amount of the tariff. This is because the tariff adds to the cost of importing the good, so the price paid by consumers will increase by the same amount. Therefore, choice A is true. Consumers will not be better off as they will have to pay a higher price for the good. There will be deadweight losses due to the tariff, even in a small country, as it distorts the market by discouraging imports and encouraging domestic production, which may not be the most efficient. Thus, choice C and D are incorrect.

The Graph Above Shows Domestic Supply and Demand with Trade