Question

1. This table shows the US domestic demand and supply schedules for oranges. Suppose the world price of oranges is $0.30 per orange.  Quantities are in thousands.

Price	Quantity of oranges Demanded	Quantity of oranges Supplied
$1.00	2	11
0.90	4	10
0.80	6	9
0.70	8	8
0.60	10	7
0.50	12	6
0.40	14	5
0.30	16	4
0.20	18	3

1. Draw the US domestic supply and demand schedules
2. With free trade, how will the US import or export?  How many?
3. Suppose the US government imposes a tariff on oranges of $0.20 per orange.  How many oranges will the US import or export after the tariff?
4. In your diagram, shade the gain or loss to the economy as a whole from the introduction of the tariff.
5. If the US had wished to use a quota instead of the tariff, what quota would have the same impact in the market?

Answer 1

a. In the above diagram, we have plotted price on the Y-axis and quantity on the X-axis. From the table, we plot the quantity supplied and quantity demanded to get the supply and demand curves respectively.

Here, domestic (US) equilibrium for oranges is attained at the point where quantity is 8 units and price is $0.7.

b. With free trade, if world price for oranges is $0.3, quantity supplied = 4 units but, quantity demanded = 16 units.

In this case, US will import 16-4 = 12 units of oranges from the world market.

c. If tariff of $0.2 per unit is imposed on imports, price of oranges becomes world price+tariff = $0.3+$0.2 = $0.5.

At this price, quantity supplied increases to 6 units and quantity demanded falls to 12 units.

Thus, at this price, US will import 12 units - 6 units = 6 units.

Thus, with tariff, level of imports falls down.

d. In the diagram below, we have shown the net effects of imposition of tariff.

Initially, areas A,B,C and D were included in the consumer surplus. But, with imposition of tariff, area A gets added to the producer surplus whereas, area B is the gain in revenues for the government. Thus, only areas C and D are the deadweight loss or loss in welfare.

e. Quota may not have the same impact as tariff. This is because quota imposes a fixed restriction on quantity of imports. As a result, level of imports are already specified for a country.