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25 May, 21:07

The United States currently imports all of its coffee. Suppose the annual demand for coffee by U. S. consumers is given by the demand curve Qequals=240240minus-55 P, where Q is quantity (in millions of pounds) and P is the market price per pound of coffee. World producers can harvest and ship coffee to U. S. distributors at a constant marginal (equals= average) cost of $66 per pound. U. S. distributors can in turn distribute coffee for a constant $11 per pound. The U. S. coffee market is competitive. Congress is considering a tariff on coffee imports of $22 per pound. A) If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity demanded? B) If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantity demanded? C) Calculate lost consumer surplus. D) Calculate the tax revenue collected by the government. E) Does the tariff result in a net gain or a net loss to society as a whole?

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  1. 25 May, 21:19
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    (a) $7; $205 million

    (b) $9; $195 million

    (c) $400 million

    (d) $390 million

    (e) Loss = $10 million

    Explanation:

    (a) Price paid by consumers when no tariff imposed:

    = Marginal cost + Distribution cost

    = $6 + $1

    = $7

    Quantity demanded:

    Q = 240 - 5P

    = 240 - 5 * $7

    = 240 - $35

    = $205 million pounds

    (b) At imposed tariff of $2 per pound, then the new price paid by consumers:

    = Marginal cost + Distribution cost + Tariff

    = $6 + $1 + $2

    = $9

    New quantity demanded:

    Q = 240 - 5P

    = 240 - 5 * $9

    = 240 - $45

    = $195 million pounds

    (c) Lost consumer surplus:

    = ($9 - $7) ($195) + (0.5) ($9 - $7) ($205 - $195)

    = ($2 * $195) + (0.5 * $2 * $10)

    = $390 + $10

    = $400 million

    (d) Tax revenue collected by government:

    = Quantity demanded under tariff * tariff

    = $195 * $2

    = $390 million

    (e) Tax revenue of $390 million received is less than the value of coffee sold under tariff $400 million.

    Loss = $400 million - $390 million

    = $10 million
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