The figure below shows the demand (D)and supply (S)curves of a good produced domestically in an economy as well as traded in the international market. Figure 21.1 In the figure, P₁: Price of the good in the international market. P₂: Price of the good in the domestic market after the imposition of tariff by the government. P₃: No-trade price of the good in the domestic market. Refer to Figure 21.1.If the government imposes a tariff such that the price of the good in the domestic market is P₂ when the international price is P₁:

Question

Quizplus · Accepted Answer

When the government imposes a tariff, the price of the good in the domestic market increases to PS1U1B12S1U1B0. Due to this increase in price, demand for the good in the domestic market falls from QD1U1B0 to QS1U1B14S1U1B0, while domestic supply increases from QS1U1B0 to QS1U1B16S1U1B0. As a result, the quantity of the good imported by the domestic country declines from QS1U1B14S1U1B0 - QS1U1B15S1U1B0 to zero, and there is no change in the quantity of the good exported by the domestic country, which remains at QS1U1B17S1U1B0 units. Therefore, the correct answer is B.

The Figure Below Shows the Demand (D)and Supply (S)curves of a Good