Question

9. Effects of a tariff on international trade The following graph shows the domestic supply of and demand for maize in Panama. The world price (Pw) of maize is $270 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 maize and that there are no transportation or transaction costs associated with international trade in maize. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool Market for Maize in Panama Supply 480 Price (Dollars per ton) Domestic Demand (Thousands of tons of maize) 60 Domestic Supply - 240 Thousands of tons of maize) - - - PRICE (Dollars per ton) ---- Demand - 0 30 60 90 120 150 180 210 240 270 300 QUANTITY (Thousands of tons of maize) If Panama is open to international trade in maize without any restrictions, it will import tons of maize.

Answer 1

From the diagram we can see that world price is $270, at which domestic producers supply only 30 thousand tons while consumers demand 240 thousand tons. Hence, the country imports the difference which is 210,000 tons of maize

For imports to be restricted to 60,000 tons, price should be $360 per ton. Hence appropriate tariff will be 360 – 270 = $90 per ton

Tariff revenue from this tariff = 90 x 60000 = 5,400,000