Question

if, at the world price, domestic producers are producing and selling 100 units of a good, then at the world price plus tariff it follows that
they will be producing and selling fewer than 100 units of the good.
consumers surplus will be greater than what it is when domestic producers produce and sell 100 units.
producers surplus will be less than what it is when domestic producers produce and sell 100 units.
they will be producing and selling more than 100 units of the good.

Explanation:

Analyze the price change

Using the Tariff Welfare Analysis knowledge point
A tariff placed on an imported good raises the domestic price of that good from the world price \(P_W\) to the tariff-inclusive price \(P_W + t\).

Determine domestic production response

Using the Tariff Welfare Analysis knowledge point
Domestic producers face an upward-sloping supply curve. When the domestic price increases from \(P_W\) to \(P_W + t\), domestic producers increase their quantity supplied along the supply curve to a level greater than the initial 100 units.

Evaluate welfare effects

Using the Producer Surplus knowledge point
Because domestic producers sell a larger quantity at a higher price, producer surplus increases. Conversely, because domestic consumers face a higher price, consumer surplus decreases compared to the free trade scenario at the world price.

Evaluate the given options

• Option 1: Incorrect. Domestic production increases, so they will produce more than 100 units.
• Option 2: Incorrect. Consumer surplus decreases when the price rises due to a tariff.
• Option 3: Incorrect. Producer surplus increases when the price rises.
• Option 4: Correct. Domestic producers will produce and sell more than 100 units.

Answer:

• they will be producing and selling fewer than 100 units of the good.
• consumers' surplus will be greater than what it is when domestic producers produce and sell 100 units.
• producers' surplus will be less than what it is when domestic producers produce and sell 100 units.
• they will be producing and selling more than 100 units of the good. (Correct answer)