Question

4. Effects of a tariff on international trade 

The following graph shows the domestic supply of and demand for wheat in Bolivia. The world price (P_w) of wheat is $245 per bushel 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 wheat and that there are no transportation or transaction costs associated with international trade in wheat. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 

If Bolivia is open to international trade in wheat without any restrictions, it will import _______ bushels of wheat.

Suppose the Bolivian government wants to reduce imports to exactly 160 bushels of wheat to help domestic producers. A tariff of $_______  per bushel  will achieve this. 

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

Answer 1

1. At the world price, the domestic supply is 40 tons and the domestic demand = 360 tons. So, 360 - 40 = 320 tons will be imported.

Answer: 320 tons.

2. Imports will be 160 when for a particular price the domestic demand is exactly 160 tons higher than the domestic supply. This happens when the price is $285 (domestic supply 120 tons and domestic demand 280 tons at this price). Now, the world price is $245. So, a tariff of $285 - $245 = $40 would be required to make the effective import price

Answer: $40 per ton

3. Revenue = import * tariff per ton = 160 * $40 = $6,400.

Answer 2

If Bolivia is open to.......... 320 bushels of wheat.

Suppose the Bolivian.......... $ 40 per bushel will achieve this.

A tariff set at this.............. 6,400 in revenue for the Bolivian government

Note : import = 360 - 40 = 320

Tariff = 285 - 245 = 40

Revenue = 40* 160 = 6400