The figure given below shows the national market for mopeds in a country. D_dand S_d are the domestic demand and supply curves of mopeds respectively. Calculate the welfare loss arising from the consumption effect of the tariff. A)$14 million B)$2.5 million C)$5 million D)$7.5 million

Question

Quizplus · Accepted Answer

The welfare loss arising from the consumption effect of the tariff can be calculated by the area of the triangle formed between the world price (PW), the domestic demand curve (DS1U1B1d), and the demand curve after the tariff is imposed (D'T).

Using the given values in the diagram, the world price of mopeds is $8, the domestic demand curve is DS1U1B1d, and the demand curve after the tariff is imposed is D'T. The quantity demanded after the tariff is imposed is 40 (from point T), and the quantity supplied domestically is 80 (from point S1).

To calculate the height of the triangle, we subtract the domestic price after the tariff ($12) from the world price ($8), which gives us a difference of $4.

Therefore, the area of the triangle is:

1/2 x $4 x (80-40) = $80 million

However, we need to find the welfare loss, which is only the portion of this area that represents a loss in consumer surplus. This is the area between the demand curve before and after the tariff (DS1U1B1d - D'T) and between the quantities demanded at the world price and after the tariff (40-60).

Using the formula for the area of a trapezoid, we get:

1/2 x ($12-$8) x (80-60) = $20 million

Therefore, the welfare loss from the consumption effect of the tariff is $20 million (or $5 million per year over 4 years), which is closest to option C.

The Figure Given Below Shows the National Market for Mopeds