Question

The United States currently imports all of its coffee. Suppose the annual demand for coffee by U.S. consumers is given by the demand curve Qequals=240240minus−55​P, where Q is quantity​ (in millions of​ pounds) and P is the market price per pound of coffee. World producers can harvest and ship coffee to U.S. distributors at a constant marginal ​(equals=​average) cost of ​$66 per pound. U.S. distributors can in turn distribute coffee for a constant ​$11 per pound. The U.S. coffee market is competitive. Congress is considering a tariff on coffee imports of ​$22 per pound.A) If there is no​ tariff, how much do consumers pay for a pound of​ coffee? What is the quantity​ demanded?B) If the tariff is​ imposed, how much will consumers pay for a pound of​ coffee? What is the quantity​ demanded?C) Calculate lost consumer surplus.D) Calculate the tax revenue collected by the government.E) Does the tariff result in a net gain or a net loss to society as a​ whole?

Answer 1

Answer:

(a) $7; $205 million

(b) $9; $195 million

(c) $400 million

(d) $390 million

(e) Loss = $10 million

Explanation:

(a) Price paid by consumers when no tariff imposed:

= Marginal cost + Distribution cost

= $6 + $1

= $7

Quantity demanded:

Q = 240 - 5P

   = 240 - 5 × $7

   = 240 - $35

   = $205 million pounds

(b) At imposed tariff of $2 per pound, then the new price paid by consumers:

= Marginal cost + Distribution cost + Tariff

= $6 + $1 + $2

= $9

New quantity demanded:

Q = 240 - 5P

   = 240 - 5 × $9

   = 240 - $45

   = $195 million pounds

(c) Lost consumer surplus:

= ($9 - $7)($195) + (0.5)($9 - $7)($205 - $195)

= ($2 × $195) + (0.5 × $2 × $10)

= $390 + $10

= $400 million

(d) Tax revenue collected by government:

= Quantity demanded under tariff × tariff

= $195 × $2

= $390 million

(e) Tax revenue of $390 million received is less than the value of coffee sold under tariff $400 million.

Loss = $400 million - $390 million

        = $10 million