Question

Suppose the small country of Aronow imports 40,000kg of bananas. The global price of bananas is $0.50 per kg. The government of Aronow collects tariff revenues of $4,000 from banana imports. Which of the following is true?
A. The consumers in Aronow pay a price of $0.60 per kg of bananas.
B. The domestic production of bananas in Aronow would increase with the removal of the tariff.
C. The deadweight loss in the market for bananas in Aronow would increase with the removal of the tariff.
D. The removal of the tariff would cause domestic consumer surplus in the market for bananas in Aronow to increase but by less than the decrease in domestic producer surplus.
E. Aronow’s total tariff revenue collected in the banana market would be maximized if the per-unit tariff were equal to the difference between its autarky price and the world price.

Answer 1

Answer:

A

Explanation:

Because Aronow is a small country, so that before tariff (free trade), the market price is equal to the global price at $0.5 per kg.

When it imposes the tariffs on the imported bananas, the market price in Aronow would increase to Price after tariff (Tariff = Price after tariff - Price free trade)

As Aronows collects tariff revenues of $4,000 for 40,000 kg of imported bananas, so that the tariff is:

+) Tariff = Tariff Revenue/ Imported quantity = 4,000/ 40,000 = $0.1 per kg

=> Price after tariff = Tariff + Price free trade = 0.1 + 0.5 = $0.6 per kg => A - true

From the attached figure, we have: the domestic production at free trade is S1; the domestic production after tariff is S2

As S2 > S1 => when tariff is removed, the domestic production would decrease => B - wrong

After imposing tariff, changes in:

+) Consumers surplus: -(A+B+C+D)

+) Producers surplus: + A => D - wrong

+) Government revenue: +C

=> Changes in national welfare after tariff = -(A+B+C+D) + A +C = - B - D = deadweight loss

=> The deadweight loss would decrease when removing tariff

=> C - wrong