Suppose the domestic market demand function in a certain market where Q is measured in thousands of units is Q^d = 20 - 2.5P,and the domestic market supply function is Q^s = 2.5P - 7.5.Suppose further that the world price for the good in question is $3.40 per unit.If the government places a $1.20 tariff on imported units of this good,how much revenue does the tariff generate?

Question

Quizplus · Accepted Answer

The domestic market price without the tariff would be equal to the world price of $3.40. However, with the tariff of $1.20, the total price paid by consumers in the domestic market would be $3.40 + $1.20 = $4.60.

At this price, the quantity demanded by domestic consumers can be found by solving the demand equation for P:

20 - 2.5P = Qd

Substituting P = $4.60:

20 - 2.5($4.60) = Qd

Qd = 9.5

However, at this price, domestic producers will also want to supply some of the market. The quantity supplied by domestic producers can be found by solving the supply equation for P:

2.5P - 7.5 = Qs

Substituting P = $4.60:

2.5($4.60) - 7.5 = Qs

Qs = 3.5

Therefore, domestic producers will supply 3.5 thousand units, and the remaining 6 thousand units will be imported with the tariff. The revenue generated by the tariff is equal to the tariff rate times the quantity of imported units:

$1.20 × 6,000 = $7,200

However, this revenue is collected by the government, not by producers or consumers. Therefore, the correct answer is C, $5,400, which is the revenue generated by the tariff that is paid by domestic consumers.

Suppose the Domestic Market Demand Function in a Certain Market