The domestic demand Q for a good X at a price P is given by Q = 400 - 2P while the supply function is given by 100 + 4P. The world price for good X is 45 in international markets. All quantities are in thousands of units. If the government imposes a tariff of 5% on imports, the imports will fall by:
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A. B. C. D.C
First note that without imports, the price prevailing in the domestic market will satisfy 400 - 2P = 100 + 4P, giving P = 50. The world price is 45 and with a 5% import tariff, it becomes 45 * 1.05 = 47.25. Since this price is lower than 50, there will continue to be imports and the price prevailing in the domestic market after the tariffs will equal 47.25.
Before the tariffs, the producers supply a quantity equal to 100 + 4 * 45 = 280 and domestic consumers demand 400 - 2 * 45 = 310 units. Thus, imports without the tariffs equal 300 - 280 = 30 units. With the tariff in place, the producers produce 100 + 4 * 47.25 = 289 units. The consumers demand 400 - 2 * 47.25 = 305.5 units.
Thus, the imports now equal 305.5 - 289 = 16.5 units.