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Suppose the oil price in world market is $60 per gallon, the U
Suppose the oil price in world market is $60 per gallon, the U.S. domestic demand curve of oil is Q = 200 - 2p and domestic supply curve is ( = 12p a) If U.S. government imposes a tariff of $15 per gallon: (1) What will be the U.S. price and the level of import? (ii) How much revenue will be the government earn from the tariff? (iii) How large is the deadweight loss? [5 marks] [3 marks] (5 marks] b) If the U.S. government has no tariff but imposes an import quota of 25: (i) what will be the domestic price? (11) What is the cost of this quota for U.S. consumers of the oil? (iii)What is the gain for U.S. producers? [5 marks] [2 marks] [5 marks]
Expert Solution
Qd = 200 - 2p
Qs = p/2 = 0.5p
(a)
(i)
With tariff, US Price = 60 + 15 = $75
Qd = 200 - 2 x 75 = 200 - 150 = 50
Qs = 75/2 = 37.5
Import = Qd - Qs = 50 - 37.5 = 12.5
(ii)
Tariff Revenue = Tariff x (Qd - Qs) = 15 x 12.5 = 187.5
(iii)
Before tariff,
Qd = 200 - 2 x 60 = 200 - 120 = 80
Qs = 60/2 = 30
Deadweight loss = (1/2) x Tariff x (Change in Qd + Change in Qs)
= (1/2) x 15 x (80 - 50 + 37.5 - 30)
= 7.5 x 37.5
= 281.25
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