Question
ariffs in a Large Open Economy Caledonia is a large open economy that imports widgets. 1. Show, in a proper diagram, Consumer Surplus, Producer Surplus
ariffs in a Large Open Economy
Caledonia is a large open economy that imports widgets.
1. Show, in a proper diagram, Consumer Surplus, Producer Surplus and Total Surplus for Caledonia in free trade. Denote the world price of widgets by PW.
Suppose now that the Caledonia government imposes a tariff on imported widgets. Because Caledonia will buy fewer widgets and it is a large country, this tariff will cause the world price to drop to P'W (with P'W + t > PW, where t is the tariff rate). Note that you are not asked to calculate the optimal tariff or the new world price, so you can choose any P'W and t consistent with P'W + t > PW .
2. Show, in the same diagram you used to answer question 1, Consumer Surplus, Producer Surplus, tariff revenue and Total Surplus for Caledonia after the tariff is introduced.
3. Is it possible for total surplus to increase as a result of the tariff?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started