Question

4. Effects of a tariff on international trade The following graph shows the domestic supply of and demand for oranges in New Zealand. The world price (Pw) of oranges is $780 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 or transaction costs associated with international trade in oranges. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 1185 Domestic Demand Domestic Supply 1140 1095 PRICE (Dollars per ton) 7351 0 40 80 320 360 400 120 160 200 240 280 QUANTITY (Tons of oranges)

Answer 1

When trade is allowed world price becomes domestic price so the price is now $780. At this, quantity demanded is in excess to quantity supplied by 320 tons of oranges. Hence imports are 320 tons of oranges

In order to restrict imports to 160 tons of oranges, domestic price should be increased to $870 per ton. At this, quantity demanded which is 280 tons is in excess to quantity supplied which is 120 tons and so imports are equal to 320 tons of oranges. Hence, the tariff is $90 per ton

Government revenue from tariff = 160 x 90 = $14,400