Question

As a result of the decrease in the world price, consumer surplus in the United States by $ million, producer surplus by $ million, and total surplus by $ million. (Hint: Recall that the area of a triangle is 12×Base×Height .) Suppose the U.S. government responded by putting a tariff of $100 on imported televisions. As a result of this import tariff, consumer surplus will , and producer surplus will . The government will raise $ million in revenue at the cost of $ million in deadweight loss. True or False: From the standpoint of U.S. welfare, this is a good policy, but domestic producers will not support it. A. True B. False

Answer 1

Answer

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Explanation  

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Answer 2

The tariff has resulted in a net drop of $80 million in combined surplus between consumers and producers, but a $60 million increase in government income, which is less than the net decrease in combined surplus between consumers and producers. This means that the tariff policy is not helpful for the welfare of the United States, and hence the supplied statement is FALSE.

What are the increase and decreases of consumer and producer surplus?

Prior to technological development, demand was 1000 units, while supply was 400. This means there are 600 units of imports.

The globe price drops by $100 as a result of technical improvement. Area CEDG is responsible for the increase in consumer surplus.

$\text{ Increase in consumer surplus (in thousand dollars)} = \text{area CEDB}$

$= \text{area CEJB} + \text{area BJD}\\= {[P1-(P1-100)] \text{ x } (1,000 - 0)} + {1/2 \text{ x } [P1-(P1-100)] \text{ x } (1,200 - 1,000)}\\= (100 \text { x } 1,000) + (1/2 \text{ x } 100 \text{ x } 2000)\\= 100,000 + 10,000\\= 110,000$

The decrease in producer surplus is given by area CEFG in image format

As a result of the lower world price, the consumer surplus rises $110,000, or $110 million; the producer surplus falls $30,000, or $30 million, and the total surplus raises $80 million.

The price will return to its original level if the government imposes a $100 tariff on imported televisions.

Imports will be reduced to 600 units, as well. Both the consumer and producer surpluses will return to their previous levels. A total of $60 million will be raised by the government.

For more information about consumers and producers, refer below

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