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A small country’s demand curve is given by Q=36-2P and its supply curve is given by Q=4P-12. Assume the world is currently in free trade and that the price under free trade is $4. What will be the government revenue if this country implements a $2 specific import tariff?

Question

A small country’s demand curve is given by Q=36-2P and its supply curve is given by Q=4P-12. Assume the world is currently in free trade and that the price under free trade is 4.Whatwillbethegovernmentrevenueifthiscountryimplementsa4. What will be the government revenue if this country implements a 2 specific import tariff?

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Solution

To solve this problem, we need to follow these steps:

  1. First, we need to find the quantity demanded and supplied at the world price of $4.

    For the demand curve Qd = 36 - 2P, substitute P = 4, we get Qd = 36 - 2*4 = 28.

    For the supply curve Qs = 4P - 12, substitute P = 4, we get Qs = 4*4 - 12 = 4.

  2. The difference between the quantity demanded and supplied is the quantity of imports. So, Imports = Qd - Qs = 28 - 4 = 24.

  3. Now, if the country implements a 2specificimporttariff,thenewworldpricebecomes2 specific import tariff, the new world price becomes 4 + 2=2 = 6.

  4. We need to find the new quantity demanded and supplied at this price.

    For the demand curve, substitute P = 6, we get Qd = 36 - 2*6 = 24.

    For the supply curve, substitute P = 6, we get Qs = 4*6 - 12 = 12.

  5. The new quantity of imports is Qd - Qs = 24 - 12 = 12.

  6. Finally, the government revenue from the import tariff is the tariff rate times the quantity of imports, which is 2∗12=2 * 12 = 24.

This problem has been solved

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