Question

Scenario 1

A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle.

Economists have estimated the following based on this tariff amount:

World price of wine (free trade): $20 per bottle
Domestic production (free trade): 500,000 bottles
Domestic production (after tariff): 600,000 bottles
Domestic consumption (free trade): 750,000 bottles
Domestic consumption (after tariff): 650,000 bottles

6.

1. Refer to Scenario 1. Before the tariff is imposed, the country imports _____ bottles of wine,

but following the imposition of the tariff, the country will import _____ bottles of wine.




A.

100,000; 100,000

B.

250,000; 50,000

C.

150,000; 50,000

D.

750,000; 650,000

7.

2. Refer to Scenario 1. The imposition of the tariff on wine will cause the surplus of the

domestic producers to _____ by ____.




A.

rise; $1 million

B.

rise; $500,000

C.

fall; $2.5 million

D.

rise; $2.75 million

8.

3. Refer to Scenario 1. The imposition of the tariff on wine will cause the surplus of the

domestic consumers to _____ by ____.




A.

fall; $10 million

B.

fall; $250,000

C.

fall; $3.5 million

D.

rise; $3.5 million



9.

4. Refer to Scenario 1. Calculate the government revenue from the tariff.




A.

$250,000

B.

$1.25 million

C.

$3.5 million

D.

$500,000

10.

5. Refer to Scenario 1. The production effect of the tariff on wine is worth




A.

$250,000.

B.

$500,000.

C.

$2.5 million.

D.

$2.75 million.

11.

6. Refer to Scenario 1. The consumption effect of the tariff on wine is worth




A.

$250,000.

B.

$500,000.

C.

$3.5 million.

D.

$2.75 million.

Answer 1

Answer: (see the image attached also)

1. B. 250,000; 50,000

Before the tariff, the domestic market demanded 750,000 bottles, but the domestic producers can only produce 500,000 bottles.

=> To meet the demand of the market, have to import: 750,000-500,000 = 250,000

After the tariff, the domestic market demanded 650,000 bottles, but the domestic producers can only produce 600,000 bottles.

=> To meet the demand of the market, have to import: 650,000-600,000 = 50,000

2. D. rise; $2.75 million

Look at the image attached, when the tariff is imposed, the surplus of producers increase by an amount equal to the area of a, which is equal to: (500,000+600,000) x 5 / 2 = $2.75 million

3. C. fall; $3.5 million

Look at the image attached, when the tariff is imposed, the surplus of producers decrease by an amount equal to the area of (a+b+c+d), which is equal to:

(750,000 + 650,000)x5/2= $3.5 million

4. A. $250,000

The number of import when there is the tariff is 50,000 bottles

=> Revenue of government: 5 x 50,000 = $250,000

5. A. $250,000

The imposition of tariff causes the production effect equal to the area of c, which is:

(600,000-500,000)x5/2= $250,000

6. A. $250,000

The imposition of tariff causes the consumption effect equal to the area of d, which is:

(750,000-650,000)x5/2= $250,000