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.How much deadweight loss would be caused by a $1.20 tariff on imported units of this good? A) $3,200 B) $3,600 C) $5,400 D) $3,000

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To calculate the deadweight loss caused by a $1.20 tariff, we first need to determine the quantities of demand and supply before and after the tariff. The world price is $3.40, so before the tariff, domestic price equals the world price.1. Calculate the quantity demanded and supplied at the world price ($3.40) before the tariff:   - QD = 20 - 2.5P = 20 - 2.5(3.40) = 11.5 thousand units   - QS = 2.5P - 7.5 = 2.5(3.40) - 7.5 = 1.5 thousand units   - Import = QD - QS = 11.5 - 1.5 = 10 thousand units2. After the $1.20 tariff, the domestic price increases to $3.40 + $1.20 = $4.60.   - QD after tariff = 20 - 2.5P = 20 - 2.5(4.60) = 8.5 thousand units   - QS after tariff = 2.5P - 7.5 = 2.5(4.60) - 7.5 = 4.5 thousand units   - Import after tariff = QD - QS = 8.5 - 4.5 = 4 thousand units3. Calculate the deadweight loss (DWL):   - The DWL is the loss in consumer and producer surplus due to the reduction in trade. It can be represented as the area of two triangles formed by the change in quantity demanded and supplied.   - The height of the triangles is the tariff ($1.20), and the base is the reduction in imports (10 - 4 = 6 thousand units).   - DWL = 1/2 * base * height = 1/2 * 6 * 1.2 = 3.6 thousand or $3,600.Therefore, the deadweight loss caused by a $1.20 tariff on imported units of this good is $3,600.

Suppose the Domestic Market Demand Function in a Certain Market