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 20.1 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 20.1.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, it raises the price of the good in the domestic market (P₂), making it more expensive for domestic consumers to purchase the good. This reduces the quantity demanded (from QD to QD'), and increases the quantity supplied (from QS to QS'), resulting in a surplus of the good in the domestic market. Some of this surplus will be exported to the international market, increasing the quantity of the good exported by the domestic country (from QE to QE'). However, since the higher price in the domestic market also reduces the quantity demanded in the international market, the total import of the good by the domestic country declines (from Q₄ to Q₅). Therefore, the correct answer is B.

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