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 $265 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 100 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

A.Import=Domestic demand-Domestic supply

At World price=265

Domestic demand=450

Domestic supply=50

Import=450-50=400

B.If the government introduces tarrif of $90,then world price will rise to $355.

At this price domestic demand=300

Domestic supply=200

Import=300-200=100

Thus,tariff of $90 is required

C.Revenue=Tarrif*quantity imported

Revenue=90*100=9000