Question

The following graph shows the domestic supply of and demand for maize in Panama. The world price (PWPW) of maize is $240 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.If Panama is open to international trade in maize without any restrictions, it will import 400 tons of maize.

510 Domestic Demand Domestic Supply PRCE (Dollars perton) 210 0 50 100 400 450 500 150 200 250 300 350 QUANTITY (Tons of maize)

Suppose the Panamanian government wants to reduce imports to exactly 200 tons of maize to help domestic producers. A tariff of $_____ per ton will achieve this.

A tariff set at this level would raise $____in revenue for the Panamanian government.

Answer 1

At price $240, domestic suppliers are williyto supply 50 tons and domestic demand is 400 tons. So, 400 tons are imported at this price.

Now, the government has to limit imports to 200 tons. The government wants to follow import tariff method.

We know that at current world price taht is $240 and the domestic supply is 50 tons. To limit the imports to 200, the government has to take the price to a level where the total domestic demand is 250 tons. Then the imports demand will be equal to 250-50 = 200 tons.

This happens at price $360. At price $360, the domestic demand is 250 tons. So, the required tariff is $360-$240 = $120.

If a tariff of $120 is imposed, the price faced by domestic consumers is $240+$120 = $360. At this price the demand is 250 tons. The price paid to domestic suppliers is $240. At this price, the domestic supply is 50 tons. So, the importa will be equal to 200 tons. A tariff of $120 on imports would lead to a government revenue of $120*200 = $24000.

To reduce imports to exactly 200 tons, the required tariff is $120 per ton.

A tariff set at this level would raise $24000 in revenue for the Panamanian government.