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Suppose that the foreign price of a good is p* = $12 and a 10 percent ad valorem tariff is put in place. Assume a small country, so that p* does not change. As a result of the tariff, domestic production rises from 2,000 units to 2,300 units and imports fall from 600 units to 200 units.

Calculate the tariff payments per unit of imports under the 10 percent ad valorem tariff. These payments are the “unit tariff rate” (also known as the “specific tariff rate”); you are asked here to calculate the tariff payments on each unit of imports when each unit costs 12 dollars and the tariff on each dollar of imports is 10 cents. In class, we used the symbol “t” to denote the unit tariff rate.

Illustrate the effects of the tariff in a supply-and-demand diagram with linear (straight line) demand and supply curves (as drawn in last Wednesday’s class and shown in Figure 8-5(a) for the small country case). In your diagram, identify the price p* = 12, the domestic price under the 10 percent tariff (calculate a number), domestic production before and after the tariff is imposed, imports before and after, and domestic consumption before and after. Note, in particular, that your diagram should show that domestic demand exceeds domestic supply by 600 units when p* = 12.

In your diagram, identify the changes in producers’ surplus and consumers’ surplus resulting from the tariff, and the amount of tariff revenue collected. Then use the formulas for triangles and rectangles to calculate these three quantities (give numbers). Show your work.

Let welfare equal the sum of producers’ surplus, consumers’ surplus, and tariff revenue. Using your answer to (c), calculate the change in welfare caused by the tariff. Show your work.

Consider now a production subsidy on a good that is imported, levied at a 10 percent ad valorem rate. Unlike a tariff, a production subsidy does not change the price consumers pay for the imported good; following…