Answer
a) Consumer surplus and producer surplus are each 8 dollars. The equilibrium quantity is 4 bags, and the equilibrium price is 4 dollars.
b) The equilibrium price is now 1 dollar, and the equilibrium quantity is now 7 bags. One bag is produced domestically, and the other six bags are imported. Consumer surplus is now 24.50 dollars, and producer surplus is now .50 dollars.
c) The new equilibrium quantity and price are, respectively, six bags and 2 dollars. Two bags are made domestically, and the other four bags are imported.
Consumer surplus is 18 dollars, and producer surplus is 2 dollars. Government revenue is 4 dollars.
d) Consumers gain 16.50 dollars in their surplus, and producers lose 7.50 dollars in their surplus (from trade opening). The deadweight loss is 1 dollar.
Work Step by Step
a) Please see the graph.
Consumer surplus:
$1/2*(8-4)*(4-0)$
$1/2*4*4$
$2*4$
$8$
Producer surplus:
$1/2*(4-0)*(4-0)$
$1/2*4*4$
$2*4$
$8$
b)
The world price is lower than the old equilibrium price, so the new equilibrium price is the world price.
Producer surplus:
$1*1*1/2$
$1*1/2$
$1/2$
Consumer surplus:
$(8-1)*7*1/2$
$7*7*1/2$
$49/2$
c)
Consumer surplus:
$(8-2)*(6-0)*1/2$
$6*6/2$
$6*3$
$18$
Producer surplus:
$(2-0)*(2-0)*1/2$
$2*2/2$
$2*1$
$2$
Tax revenue:
# bags imported * one dollar
$(6-2)*1$
$4*1$
$4$
d)
Total original surplus (pre-tariff)
$1/2+49/2$
$50/2$
$25$
original surplus = new producer surplus + new consumer surplus + new government revenue + deadweight loss
$25 = 18 + 2 + 4+ x$
$25=24+x$
$1=x$
