The following graph shows the demand curve (D) of a home country facing the foreign monopoly supplier of a good to the home country, the associated marginal revenue curve (MR), the foreign firm’s horizontal marginal cost curve when there is no tariff imposed by the home country (MC), and the foreign firm’s marginal cost curve plus the cost of the tariff when a specific tariff is imposed by the home country (MC + t):
Assuming that average cost (AC) equals marginal cost:
(a) Indicate the price charged to home country consumers by the foreign monopoly supplier when there is no home country tariff.
(b) Indicate the price charged to home country consumers by the foreign monopoly supplier when the home country tariff is in place.
(c) Calculate the loss in consumer surplus in the home country because of the imposition of the tariff.
(d) Calculate the amount of former foreign monopoly profit that is transferred as tariff revenue to the home country when the home country imposes the tariff.
(e) Does the home country “gain” or “lose” because of the imposition of the tariff? What is the dollar value of the gain or loss?
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