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 $260 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 200 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

It will import 450-50= 400 bushels of wheat.
At P= 310, imports = 350-150= 200

A tariff of 310-260= 50

Revenue = 50*200= 10000