A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: $$\begin{array} { l l }
\text { World price of wine (free trade): } & \$ 20 \text { per bottle } \
\text { Domestic production (free trade): } & 500,000 \text { bottles } \
\text { Domestic production (after tariff): } & 600,000 \text { bottles } \
\text { Domestic consumption (free trade): } & 750,000 \text { bottles } \
\text { Domestic consumption (after tariff): } & 650,000 \text { bottles }
\end{array}$$ The production effect of the tariff on wine is worth
A)$250,000.
B)$500,000.
C)$2.5 million.
D)$2.75 million.

Question

A small country is considering imposing a tariff on imported wine at the rate of $5 per bottle. Economists have estimated the following based on this tariff amount: $$\begin{array} { l l } 
\text { World price of wine (free trade): } & \$ 20 \text { per bottle } \
\text { Domestic production (free trade): } & 500,000 \text { bottles } \
\text { Domestic production (after tariff): } & 600,000 \text { bottles } \
\text { Domestic consumption (free trade): } & 750,000 \text { bottles } \
\text { Domestic consumption (after tariff): } & 650,000 \text { bottles }
\end{array}$$ The production effect of the tariff on wine is worth
A)$250,000.
B)$500,000.
C)$2.5 million.
D)$2.75 million.

Quizplus · Accepted Answer

The production effect of the tariff is calculated by the increase in domestic production due to the tariff, multiplied by the world price of wine. The increase in domestic production is 100,000 bottles (600,000 - 500,000), and at the world price of $20 per bottle, this equals $2,000,000 (100,000 bottles * $20/bottle). However, the correct calculation for the production effect should consider the increase in domestic production due to the tariff, which is 100,000 bottles, but the value should be calculated based on the tariff amount, not the world price. Therefore, the correct calculation is 100,000 bottles * $5/bottle = $500,000. My initial explanation contained a calculation error. The correct answer, based on the tariff amount and the increase in domestic production, is indeed $500,000.

A Small Country Is Considering Imposing a Tariff on Imported