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 and 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 Pw = $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). 490 Domestic Demand Domestic Supply PRICE (Dollars per ton) 190 0 20 40 160 180 200 60 80 100 120 140 QUANTITY (Tons of wheat) If New Zealand allows international trade in the market for wheat, it will import tons of wheat.
fill in the blank

1)increase/decrease

2)increase/decrease

3)gain/loss

Answer 1

Domestic Demand Domestic Supply 8 PRICE (Dollars per ton) 0 20 40 160 180 200 60 80 100 120 140 QUANTITY (Tons of wheat)

Import = 160-40 =120 tons

With tariff, the price increases to 310 and Imports = 120-80 = 40 tons

Domestic Demand Domestic Supply World Price Plus Tariff PRICE (Dollars per ton) Government Revenue 190 0 20 40 160 180 200 DWL 60 80 100 120 140 QUANTITY (Tons of wheat)

	Free trade	Tariff
CS	0.5*160*(490-250) = 19200	0.5*120*(490-310) = 10800
PS	0.5*40*(250-190) = 1200	0.5*80*(310-190) = 4800
GR	0	40*60 = 2400

CS decreases by 19200-10800 = 8400

PS increases by 4800-1200 = 3600

GR = 2400

Net welfare effect is a loss of 2400