Question

4. Effects of a tariff on international trade 

The following graph shows the domestic supply of and demand for soybeans in Guatemala. The world price (Pw) of soybeans is $820 per ton and is represented by the horizontal black line. Throughout the question, assume that the amount demanded by any one country does not affect the world price of soybeans and that there are no transportation or transaction costs associated with international trade in soybeans. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 

If Guatemala is open to international trade in soybeans without any restrictions, it will import _______  tons of soybeans.

Suppose the Guatemalan government wants to reduce imports to exactly 60 tons of soybeans to help domestic producers. A tariff of _______ will achieve this. 

A tariff set at this level would raise $_______  in revenue for the Guatemalan government.

Answer 1

If Guatemala is open to international trade in oranges without any restrictions, at the world price of $820 per ton, quantity demanded = 240 tons of oranges and quantity supplied = 60 tons of oranges. So, the country will import (240 - 60) = 180 tons of oranges.

Suppose the Guatemalan government wants to reduce imports to exactly 60 tons of oranges to help domestic producers. A tariff of $110 per ton will achieve this. A tariff of this amount will increase price to $(820 + 110) = $930. At this price, quantity demanded = 180 tons of oranges and quantity supplied = 120 tons of oranges. Then the country will import (180 - 120) = 60 tons of oranges.

A tariff set at this level would raise tariff revenue = (tariff amount * after tariff import quantity) = $(110 * 60) = $6600