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Tariffs and Quotas

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The United States currently imports all of it's coffee. The annual demand for coffee by US consumers is given by the demand curve Q = 250 - 10P, where Q is quantity (in millions of pounds) and P is the market price per pound of coffee. World producers can harvest and ship coffee to us distributors at a constant marginal (= average) cost of $8 per pound. US distributors can in turn distribute coffee for a constant $2 per pound. The US coffee market is competitive. Congress is considering a tariff on coffee imports of $2 per pound.

a) If there is no tariff, how much do consumer pay for a pound of coffee? What is the quantity demanded?

b) If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the quantity demanded?

c) Calculate the lost consumer surplus

d) Calculate the tax revenue collected by the government

e) Does the tariff result in a net gain or a net loss to society as a whole?

I'm not certain if I am correct on the following or not.

a) Consumers will pay $10 dollars per pound and the quantity demanded would be 23.936 million pounds.

b) I am not sure how to get started on this part.

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Solution Summary

Calculate the lost consumer surplus.

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