Question

The follawing graph shows the domestic supply of and demand for oranges in Bangladesh. The world price (Pw) of oranges is $760 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 oranges and that there are no transportation ocin costs ssociated with international trade in oranges. Also, assume that domestic 1165 Domesic Demand 1120 1075 1030 Domestic Supply + 985 n. 940 u 395 Pw 15 0 300120 0 180 210 240 270 300 QUANTITY (Tons of oranges) Ir Bangladesh is open to international trade in oranges without any restrictions, it will import Suppose the Bangladeshi gavernment wants to reduc imports to exacty 60 tons of oranges to help domestie producers. A tariff of S will achieve this. A tariff set at this level woud raiseS

Answer 1

Answer

If Bangladesh Opens to international trade with no restriction then World Price is the Price that will Prevail in the Bangladesh. At Price = 760, quantity demand = 270 and quantity supplied = 30. Hence Shortage = quantity demand - quantity supplied = 270 - 30 = 240 tons of Oranges.

Hence as there is shortage of 240 tons of Oranges, Hence it will import 240 tons of Oranges.

Suppose Government wants to reduce imports to 60 tons of oranges. For that purpose, the price that should prevail in the market is the price at which Shortage = 60 tons of oranges. We can see from above graph that Shortage = 60 tons, when price = $895. At P = $895, Quantity demand = 180 and quantity supplied = 120 and hence shortage = 180 - 120 = 60 tons.

Hence Tariff = 895 - P_W = 895 - 760 = $135

Now Government will receive $135 for 1 ton of orange imports and as total import = 60 tons. Hence A tariff set at this level would rate 135*60 = $8100 in revenue for Bangladesh government