Question

If the U.S. government implements a tariff on Chinese tire imports, the price of Chinese-made tires will ________, the quantity demanded will ________, and consumer surplus will ________.

Answer 1

The correct answers are the following:

• increase
• decrease
• decrease

1. A tariff is a trade barrier implemented by countries that follow a protectionist international trade approach. It is a tax charged on imported products and it increases the per-unit cost of introducing and commercializing those goods in a certain country and, in turn, the tariff increases the market price of each unit.

2. The demand function represents the quantity of a certain good or service that consumers are willing to purchase in the market at different price levels. The law of demand states that there is an inverse relationship between price and quantity demanded (ceteris paribus, hence, given that the rest remains equal). Therefore, when the price charged for the imported products (due to the tariff) increases, the amount that consumers are willing to purchase decreases.

3. The consumer surplus is the profit earned by consumers when purchasing and consuming a certain good of service. It is calculated as the difference between the level of satisfaction gained by the individual from its consumption and the price paid for it. If the price increases (and satisfaction remains equal), then the consumer surplus decreases.