7. Effects of a tariff in a large nation The following graph shows the domestic market for oil in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of oil. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of oil that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per barrel of oil and a quantity of 16 million barrels. At this price, the United States imports 12 million barrels of oil. Suppose the U.S. government imposes a $100-per-barrel tariff on oil imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+w+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. (?) PRICE (Dollars per barrel) 560 520 480 440 400 360 320 280 240 200 160 0 DD Sp+W 2 + 4 6 8 10 12 14 16 QUANTITY OF OIL (Millions of barrels) SD 18 20 SD+W+T Equilibrium Under Tariff Domestic Revenue Effect Terms-of-Trade Effect + Deadweight Loss
7. Effects of a tariff in a large nation The following graph shows the domestic market for oil in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world price of oil. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of oil that both domestic and foreign producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per barrel of oil and a quantity of 16 million barrels. At this price, the United States imports 12 million barrels of oil. Suppose the U.S. government imposes a $100-per-barrel tariff on oil imports. On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+w+T). Then use the grey point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff. (?) PRICE (Dollars per barrel) 560 520 480 440 400 360 320 280 240 200 160 0 DD Sp+W 2 + 4 6 8 10 12 14 16 QUANTITY OF OIL (Millions of barrels) SD 18 20 SD+W+T Equilibrium Under Tariff Domestic Revenue Effect Terms-of-Trade Effect + Deadweight Loss
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:7. Effects of a tariff in a large nation
The following graph shows the domestic market for oil in the United States, where Sp is the domestic supply curve, and Dp is the domestic demand
curve. Assume the United States is considered a large nation, meaning that changes in the quantity of its imports due to a tariff influence the world
price of oil. Under free trade, the United States faced a total supply schedule of Sp+w, which shows the quantity of oil that both domestic and foreign
producers together offer domestic consumers. In this case, the free-trade equilibrium (black plus) occurs at a price of $280 per barrel of oil and a
quantity of 16 million barrels. At this price, the United States imports 12 million barrels of oil.
Suppose the U.S. government imposes a $100-per-barrel tariff on oil imports.
On the following graph, use the tan line (rectangle symbol) to draw the new total supply schedule including the tariff (SD+w+T). Then use the grey
point (star symbol) to indicate the new market equilibrium price and quantity as a result of the tariff.
(?)
PRICE (Dollars per barrel)
560
520
480
440
400
360
320
280
240
200
160
0
DD
Sp+W
2
+
4
6
8
10 12 14 16
QUANTITY OF OIL (Millions of barrels)
SD
18 20
SD+W+T
Equilibrium Under Tariff
Domestic Revenue Effect
Terms-of-Trade Effect
+
Deadweight Loss
Transcribed Image Text:The tarrif's revenue effect (the import tariff multiplied by the quantity of oil imported) can be broken into two components:
• Domestic revenue effect
• Terms-of-trade effect
On the previous graph, use the green rectangle (triangle symbols) to indicate the domestic revenue effect of the tariff. Then use the purple rectangle
(diamond symbols) to indicate the terms-of-trade effect.
Now consider the effect of the tariff on welfare in the United States. On the previous graph, use the black triangles (plus symbols) to indicate the
deadweight loss caused by the tariff.
True or False: National welfare in the United States increases as a result of a $100-per-barrel tariff on oil imports.
O True
O False
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