AGEC 3300 Homework 3
Assume that the price of coffee in the world market is $13 per unit. China is a small country in
the market, and Figure 2 shows the coffee demand and supply in China. China decided to
impose a tariff of $4/unit. The tariff will reduce domestic consumption of coffee, as shown in
Figure 2.
a) What will happen to consumers after the tariff
is imposed? What is the area representing the
change in consumer surplus?
Consumers pay a higher price $17, and demand
decrease from Q4 to Q3.
The change in consumer surplus is represented
by area: a+b+c+d
b) What is the area representing the change in
producer surplus?
a
c) What is the area representing the tariff revenue earned by Chinese government?
C
d) What is the area representing the protection cost, or deadweight loss of the tariff?
b+d