Answered: Price of TextilesQuantity of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose the nation of Isoland is an importer of textiles and is looking for a way to raise government revenue. The following graph shows the effect of a tariff on textile imports.

Price of TextilesQuantity of TextilesDemand Supply PWPW+TABCDEFGQS,1QS,2QD,2QD,1

Having rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the same-sized tax on textile consumption (including both imported and domestically produced textiles).

Compared to the free trade scenario, the quantity of textiles consumed in Isoland will , and the quantity produced in Isoland will under a textile consumption tax.

The following table shows the effect of an import tariff on the nation of Isoland.

Complete the remaining columns of the following table by indicating the effect of the same-sized tax on textile consumption.

	Before Tariff or Tax	Under Tariff	Under Consumption Tax
After	Change	After	Change
Consumer Surplus	A+B+C+D+E+FA+B+C+D+E+F	A+BA+B	−(C+D+E+F)−C+D+E+F
Producer Surplus	GG	C+GC+G	+C+C
Government Revenue	None	EE	+E+E
Total Surplus	A+B+C+D+E+F+GA+B+C+D+E+F+G	A+B+C+E+GA+B+C+E+G	−(D+F)−D+F

Compared to the consumption tax, the tariff raises revenue for the government and has deadweight loss associated with it.

Supply
A
B
Pw+T
E
F
Demand
P,
w
G
Quantity of Textiles
-- -
-- -
Price of Textiles

Complete the remaining columns of the following table by indicating the effect of the same-sized tax on textile consumption.
Under Tariff
Under Consumption Tax
Before Tariff or Tax
After
Change
After
Change
A +B+C+D+E+F
A +B
- (C+D+E+F)
Consumer
Surplus
Producer Surplus
G
C+G
+C
Government
None
E
+E
Revenue
Total Surplus
A +B+C+D+E+F+G
A +B+C+E+G
- (D+F)

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