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## Microeconomics

### Course: Microeconomics > Unit 4

Lesson 3: International trade# Sample free response question (FRQ) on tariffs and trade

AP.MICRO:

POL‑1 (EU)

, POL‑1.B (LO)

, POL‑1.B.1 (EK)

, POL‑1.B.2 (EK)

, POL‑1.B.3 (EK)

In this video, walk through the solution to a question on the effect of tariffs from the 2012 AP(R) Microeconomics exam.

## Want to join the conversation?

- At3:47, haven't you calculated the total consumer surplus instead of just the
*domestic*consumer surplus? Or have I misunderstood the term?(3 votes)- The market shown is only the domestic market.(2 votes)

- Wouldn't the answer to part C be a $3 tariff since it's asking for maximum domestic consumer / producer surplus (maximum surplus at equilibrium). Sal is right that having no tariff will yield the highest consumer / producer surplus because you can import when domestic production can't keep up with demand.(3 votes)
- What is called dead weight loss?what is quota?(3 votes)
- In my definition, dead weight loss is the
**total amount of benefit**(surplus) you could've had without**government taxes**(i.e. tariffs).

A quota is like a price cap:**the maximum amount of import**for a certain product.

You can watch the video on Trade and tariffs for detailed explanation: https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/unit-2-supply-and-demnd/29-international-trade-and-public-policy/v/trade-and-tariffs(1 vote)

- for part c), can the tariff be 7? there won't be consumer surplus anymore, but the total surplus will be maximized(2 votes)
- The equilibrium price for the domestic goods is $5, though the price of foreign goods with a tariff is only $4. So, why would any consumer in this scenario buy from domestic producers if they could buy the same product imported with a tariff for cheaper? And with that, why would any domestic producer continue to produce the product if it's being made by, and imported from foreign producers for less?(1 vote)
- That's why there are tariffs on the imports, the tariffs raise the price of imported products making it even or higher in price than domestically produced goods(0 votes)

## Video transcript

- [Instructor] We're told
sugar is freely traded in the world market. Assume that a country, Loriland, is a price taker in the
world market for sugar. Some of the sugar consumed in Loriland is produced domestically
while the rest is imported. The world price of sugar is $2 per pound. The graph below shows
Loriland's sugar market, and P sub W represents the world price. So we see our domestic demand, we see our domestic supply, and then we see the world price. All right, now let's try
to answer the questions that they have given us. At the world price of $2 per pound, how much sugar is Loriland importing? So pause this video, and see if you can figure
that out on your own. All right, now let's do it together. So at first, you look at
your domestic demand and see, well, what would the domestic
demand be at the world price? So that would be where
these two lines intersect. So the domestic demand at the world price would be 14 million pounds. You might be tempted to
put 14 million pounds here, but that would be the
total domestic demand at that world price. But some of that is domestically produced, and some of it is imported. How much is domestically produced? Well, at a price of $2, the
domestic producers are up for producing two million
of those 14 million pounds. So this is domestic production. And so between these
two points, that length, that represents how much
is actually imported. So to go from two million
pounds to 14 million pounds, 14 minus two is 12 million pounds. That is imported, 12 million pounds. Part b, suppose that Loriland imposes a per-unit
tariff on sugar imports, and the new domestic price
including the tariff is $4. Identify the new level
of domestic production. So once again, pause the video,
and try to figure that out. All right, so they say
the new domestic price including the tariff is $4. So we are now in this situation. This is the new price. Now, they say what is the new
level of domestic production? So the domestic supply, at that price, the domestic suppliers look
like they are willing to supply six million pounds. So that is our new level
of domestic production, six million pounds. All right, part ii, calculate the domestic
consumer surplus for Loriland. You must show your work. Pause the video, and see
if you can figure that out. Well, the domestic consumer
surplus for Loriland in this scenario, where this is the price, well, then we are going to,
let me scroll down a little bit so we can see the entire consumer surplus. That is going to be the area above this horizontal line at the price and below our domestic demand curve. So this right over here
is the consumer surplus in that scenario. And so that is going to be this width, which is the quantity demanded,
which is 10 million pounds, times the height, which is, you're going from four to $9, so it has a height of $5, and then times 1/2. If I just multiplied the
quantity times the height, I'd be figuring out the area
of this entire rectangle, so it's a little bit of a geometry review. To get half of that, we
would multiply it by half. So this is going to be, it's going to be 10 million pounds. I'll do it right over
here, so I have some space. 10 million pounds times, we have a difference of $5 per pound, $5 per pound. And then, of course, we want
to multiply it times 1/2, so this one right over here. So let's see, the pounds cancel out. And so, if you multiply it out, this is going to be $50 million times 1/2. So it's going to be $25 million. All right, part iii, scroll down a little bit. Calculate the total tariff revenue collected by the government. This also says you must show your work. Once again, pause the video, and see if you can work through that. So the tariff revenue
collected by the government, well, we went from a world
price of $2 per pound to a domestic price of $4 per pound, so it was a $2 per pound tariff. And the government is
collecting that $2 per pound on the imports. So in this situation, this
is the domestic supply. We've already talked about that. And so this amount right
over here, are the imports. So if you multiply this amount, which went from six million
pounds to 10 million pounds, so this is going to be
four million pounds, times the tariff, which is $2 per pound, per pound, you're going to get this area, which would be the government revenue. So this is going to be four million pounds times $2 per pound, times $2 per pound. Pound cancels out, and this is an area of a rectangle here. And so this is going to
be equal to eight million, $8 million. All right, now let's do part c. Given the world price of
$2, what per-unit tariff maximizes the sum of Loriland's
domestic consumer surplus and producer surplus? Pause the video once more, and see if you can figure this out. All right, so you might be tempted to try out a bunch of tariffs and figure out if you can
get a higher total surplus, but the important thing
to realize is any tariff is going to reduce your
total economic surplus. So you can immediately
go and say that, hey, the ideal per-unit tariff is going to be $0 per unit. And if you want to see
visually why that is, we talk about it in other videos. Remember, in the first situation, where we're just at the world
price without any tariffs, the total economic surplus, this is the domestic producer surplus, which isn't that much, but you
have a huge consumer surplus. You have all of this area as well. So those two triangles make
the total economic surplus. Now, a tariff is going
to raise this level. And as you raise this level, as you saw in the case of part b, well, you're going to
shrink this upper triangle. You will grow this bottom triangle, but you're still going to be smaller than your two triangles
that you had before. Because look at that second scenario, the scenario in part b. Your consumer surplus has now shrunk to this right over here. Your producer surplus has
grown to that over there. But you haven't grown the total surplus. In fact, now for the
consumers and the producers, you've lost this entire triangle. Some of it is captured
by government revenue, but you also have deadweight loss. You also just have this section and this section as just deadweight loss. And so any tariff is going to reduce the, is going to reduce your
possible economic surplus. So a $0 tariff, theoretically, would maximize your
total economic surplus.