The domestic supply and demand curves for hula beans are as follows: Supply: P = 50 + Q Demand: P = 200 - 2Q where P is the price in cents per pound and Q is the quantity in millions of pounds. The U.S. is a small producer in the world hula bean market, where the current price (which will not be affected by anything we do) is 60 cents per pound. Congress is considering a tariff of 40 cents per pound. Find the domestic price of hula beans that will result if the tariff is imposed. Also compute the dollar gain or loss to domestic consumers, domestic producers, and government revenue from the tariff.

1. CHAPTER 9
QUESTION 3
Tariffs

2. Question No. 3
The domestic supply and demand curves for hula beans are as follows:
Supply: P = 50 + Q Demand: P = 200 - 2Q
where P is the price in cents per pound and Q is the quantity in millions of pounds.
The U.S. is a small producer in the world hula bean market, where the current price
(which will not be affected by anything we do) is 60 cents per pound. Congress is
considering a tariff of 40 cents per pound.
Find the domestic price of hula beans that will result if the tariff is imposed.
Also compute the dollar gain or loss to domestic consumers, domestic producers,
and government revenue from the tariff.

3. Given
Supply: P = 50 + Q
Demand: P = 200 - 2Q
World Price = 60c/pound
Tariff = 40c/pound.
Question:
Find the domestic price.
The domestic price of hula beans that will
result if the tariff is imposed:
world price + tariff
60 + 40 =100
Therefore, the domestic price of hula
beans that will result if the tariff is imposed is
100 cents per pound or $1 per pound.
World price + Tariff

4. Given
Supply: P = 50 + Q
Demand: P = 200 - 2Q
World Price = 60c/pound
Tariff = 40c/pound.
QEQ = 50
QS = 10
QD = 70
Imports = 60
D

5. Formulas
∆ CS = A + B + C
∆ PS = - A
∆ TS = B + C
∆ CS = A + B + C
∆ CS = (40*10 + 0.5*40*40) + (0.5*40*40) + (0.5*40*20)
∆ CS = 1200 + 800 + 400
∆ CS = 2400
Therefore, change in consumer surplus
presents a loss of 2400 million cents or $24
million.
Change in consumer surplus

6. Formulas
∆ CS = A + B + C
∆ PS = - A
∆ TS = B + C
∆ PS = - A
∆ PS = - (40*10 + 0.5*40*40)
∆ PS = - 1200
Therefore, change in producer surplus
presents a gain of 1200 million cents or $12
million.
Change in producer surplus

7. Formulas
∆ CS = A + B + C
∆ PS = - A
∆ TS = B + C
Now, because domestic production is equal to
domestic demand at $1, no hula beans are
imported and therefore government receives
no revenue. Instead we only have dead weight
loss of 1200 million cents or $12 million.
∆ TS = B + C
∆ TS = (0.5*40*40) + (0.5*40*20)
∆ TS = 800 + 400
∆ TS = 1200
Government revenue from the tariff.

8. THANK YOU!

9. Given
Supply: P = 50 + Q
Demand: P = 200 - 2Q
World Price = 60c/pound
Tariff = 40c/pound.
Question:
Find the domestic price.
50 + Q = 200 - 2Q
3Q = 150
Q = 50
Therefore the equilibrium quantity is 50 million
of pounds.
if PD = 200 – 2Q then,
PD = 200 – 2(50)
PD = 100
Therefore the equilibrium price is 100 cents per
pound.
Domestic equilibrium price and quantity.

10. Given
Supply: P = 50 + Q
Demand: P = 200 - 2Q
World Price = 60c/pound
Tariff = 40c/pound.
if PD = 200 – 2Q then,
60 = 200 – 2Q
Q = 70
Therefore, at world price of 60c/pound
quantity demanded is 70 million of pounds.
if PS = 50 + Q then,
60 = 50 + Q
10 = Q
Therefore the equilibrium price is 100 cents per
pound.
Imports 70 - 10 = 60
@World price, domestic quantity demanded