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 consumption effect of the tariff on wine is worth
A)$250,000.
B)$500,000.
C)$3.5 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 consumption effect of the tariff on wine is worth
A)$250,000.
B)$500,000.
C)$3.5 million.
D)$2.75 million.

Quizplus · Accepted Answer

The consumption effect of the tariff is calculated by the reduction in consumption multiplied by the tariff amount. The reduction in consumption is 750,000 bottles (free trade) - 650,000 bottles (after tariff) = 100,000 bottles. The tariff is $5 per bottle. Therefore, the consumption effect is 100,000 bottles * $5/bottle = $500,000.

A Small Country Is Considering Imposing a Tariff on Imported