The domestic demand Q for a good A at a price P is given by Q = 500 - 5P while the supply function is given by 300 + 3P. The world price for good X is 19.
If the government imposes a 10% tariff on imports, the revenues of the domestic producers will
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A. B. C. D.Explanation
First note that without imports, the price prevailing in the domestic market will satisfy 500 - 5P = 300 + 3P, giving P = 25. The world price is 19 and with a 5% import tariff, it becomes 19 * 1.1 = 20.9. Since this price is lower than 25, there will continue to be imports and the price prevailing in the domestic market after the tariffs will equal 20.9. Before the tariffs, the producers supply a quantity equal to 300 + 3 * 19 = 357 and have revenues of 357 * 19 = 6,783. With the tariff in place, the producers produce 300 + 3 * 20.9 = 362.7 units and have revenues of 362.7 * 20.9 = 7,580. Thus, the revenues increase by 7,580 - 6,783 = 797.
Note that we have implicitly used the fact that the domestic producers do not have to pay the tariff and pocket the entire higher price.