A small country’s demand curve is given by Q=36-2P and its supply curve is given by Q=4P-12. Assume the world is currently in free trade and that the price under free trade is $4. What will be the government revenue if this country implements a $2 specific import tariff? Group of answer choices 39 24 78 26
Question
A small country’s demand curve is given by Q=36-2P and its supply curve is given by Q=4P-12. Assume the world is currently in free trade and that the price under free trade is 2 specific import tariff? Group of answer choices
39
24
78
26
Solution
To solve this problem, we first need to understand what a specific import tariff is. A specific import tariff is a fixed fee that is imposed on a specific type of imported good. In this case, the tariff is $2.
Step 1: Determine the quantity demanded and supplied at the world price of $4.
Using the demand curve Q=36-2P, we substitute P=4 to get Q=36-2*4=28. This is the quantity demanded at the world price.
Using the supply curve Q=4P-12, we substitute P=4 to get Q=4*4-12=4. This is the quantity supplied at the world price.
Step 2: Determine the quantity demanded and supplied at the new price of 4 world price + $2 tariff).
Using the demand curve Q=36-2P, we substitute P=6 to get Q=36-2*6=24. This is the quantity demanded at the new price.
Using the supply curve Q=4P-12, we substitute P=6 to get Q=4*6-12=12. This is the quantity supplied at the new price.
Step 3: Determine the quantity of imports at the new price.
The quantity of imports is the difference between the quantity demanded and the quantity supplied at the new price. So, the quantity of imports is 24-12=12.
Step 4: Calculate the government revenue.
The government revenue from the tariff is the tariff rate times the quantity of imports. So, the government revenue is 24.
So, the correct answer is $24.
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