Question

4. Effects of a tariff on international trade The following graph shows the domestic supply of and demand for soybeans in Venezuela. The world price (Pw) of soybeans is $550 per ton 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 soybeans and that there are no transportation or transaction costs associated with international trade in soybeans. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.

Answer 1

Ans: It will import 320 tons of soybeans.

Explanation:

At world price $550;

Domestic supply of soybeans = 40 tons

Domestic demand for soybeans = 360 tons

Import quantity = 360 - 40 = 320 tons

Ans: A tariff of $90 per ton will achieve this.

Explanation:

By imposing tariff of $90 , the domestic price for soybeans will become $640 per ton ( $550 + $90 ).

At price $640 ,

Domestic supply of soybeans = 120 tons

Domestic demand for soybeans = 280 tons

Import quantity = 280 - 120 = 160 tons.

Ans: A tariff set at this level would raise $14000 in revenue for the Venezuelan government.

Explanation:

Total revenue from the imposition of tariff = Tariff * Import quantity = $90* 160 = $14400