Import Tariffs and Quotas Under Imperfect Competition

Consider the case of a Foreign monopoly with no Home production, as shown in the figure. Starting from free trade, consider the impact of a $5 tariff applied by the Home government.

a. If the demand curve is linear, the shape of the marginal revenue curve is?

.

b. By how much does the tariff?inclusive Home price increase because of the tariff?

c. What is the new net?of?tariff price received by the Foreign firm after the tariff is imposed?

d. Place the three shapes on the graph to illustrate the welfare effects of the tariff. Highlight the deadweight loss with the shape DWL. Highlight the terms?of?trade effect with the shape TOT effect. Use shape Area 1 to illustrate the loss of consumer surplus beyond the deadweight loss.

20 19 18 Area 1 17 16 DWL 15 TOT effect Price ($) MC+t ONWACO NODOSNW MC MR D 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quantity