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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Business

Anastasia Underwood

29 July, 04:15

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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Answers (1)

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Cesar Mcconnell · Answer 1

(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