Question

Suppose New Zealand is open to free trade in the world market for wheat. Because of New Zealand's small size, the demand for apd supply of wheat in New Zealand do not affect the world price. The following graph shows the domestic wheat market in New Zealand. The world price of wheat is Rv $250 per ton. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS). 400 Domestic Demand Domestic Supply 460 cs 400 PS 370 340 uw 310 280 250 220 0 20 40 6 80 100 120 140 160, 180 200 QUANTITY (Tons of wheat) Type here to search

Answer 1

400 Domestic Demand Domestic Supply 460 cs 430 PS 370 280 250 190 0 20 40 6 80 100 120 140 160 180 200 QUANTITY (Tons of wheat) 0 20

Imports = Quantity demanded - Quantity supplied = 160 - 40 = 120 tons

Price after tariff = 250 + 60 = 310

New imports = 120 - 80 = 40 tons

490 Domestic Demand Domestic Supply 460 World Price Pilus Tariff 430 400 CS 370 340 310 PS 280 Government Revenue 0 20 40 80 100 120 140 160 180 200 QUANTITY (Tons of wheat) DWL

Under Free Trade;

Consumer surplus = 1/2 x base x height = 1/2 x 160 x (490 - 250) = 80 x 240 = 19200

Producer surplus = 1/2 x 40 x (250 - 190) = 20 x 60 = 1200

Under a Tariff;

Consumer Surplus = 1/2 x 120 x (490 - 310) = 60 x 180 = 10800

Producer surplus = 1/2 x 80 x (310 - 190) = 40 x 120 = 4800

Government revenue = (310 - 250) x (120 - 80) = 60 x 40 = 2400

Consumer surplus decreases by 19200 - 10800 = 8400

Producer surplus increases by 4800 - 1200 = 3600

Government collects revenue of 2400

Net welfare effect is loss of; DWL = 1/2 x 60 x (80 - 40) + 1/2 x 60 x (160 - 120) = 30 x 40 + 30 x 40 = 2400