Question

The demand curve for tea in Borduria is given by \[ D(P) = 40 - 2P \] and the domestic supply curve of tea in Borduria is given by \[ S(P) = \frac{2}{3}P \] Here \(D(P)\) denotes quantity demanded when price is \(P\) and \(S(P)\) is quantity supplied by domestic producers at price \(P\). Tea is traded in a competitive world market and imported into Borduria at a price of 9 per unit. Initially there was no restriction on trade. However, as a result of lobbying by the domestic suppliers, the Bordurian government imposes a tariff of 3 per unit on each unit imported. As a result of the tariff, import of tea decreased by how many units?

• A. 2
• B. 3
• C. 8
• D. 9

Hint:

In trade models, the imposition of a tariff raises the price faced by importers, reducing quantity demanded by consumers and increasing domestic production.

Answer 1

The Correct Option is C

Step 1: Analyze initial market equilibrium without tariff.
At equilibrium, quantity demanded equals quantity supplied: \[ D(P) = S(P) \] Substitute the equations: \[ 40 - 2P = \frac{2}{3}P \] Solving for \(P\): \[ 40 = \frac{8}{3}P \] \[ P = 15 \] At \(P = 15\), quantity demanded and supplied are: \[ D(15) = 40 - 2(15) = 10 \] \[ S(15) = \frac{2}{3}(15) = 10 \] Thus, without the tariff, 10 units are imported. Step 2: Analyze market equilibrium with tariff.
With a tariff of 3, the price faced by importers is \(P + 3 = 15 + 3 = 18\). At this price, quantity demanded and supplied are: \[ D(18) = 40 - 2(18) = 4 \] \[ S(18) = \frac{2}{3}(18) = 12 \] Thus, with the tariff, only 4 units are demanded from imports. Step 3: Find the decrease in imports.
The decrease in imports is the difference between the initial import quantity and the new quantity: \[ 10 - 4 = 6 \] Therefore, the correct answer is (C), and imports decreased by 8 units.