Question

3. Welfare effects of a tariff In a small country Suppose Kenya is open to free trade in the world market for wheat. Because of Kenya's small size, the demand for and not affect the world price. The following graph shows the domestic wheat market In Kenya. The world price of wheat is supply of wheat in Kenya do Pw - $250 per tor. On the following graph, use the green triangle (triangle symbols) to shade the ares representing consumer surplus (C5) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (ps). 460 Domestic Demand Domestic Supply CS 400 370 340 PS 310 280 250 190 0 25 50 75 100 125 150 175 200 226 250 QUANTITY (Tons of wheat) tons of wheat. If Kenya allows international trade in the market for wheat, it will import

Answer 1

DS Pa OS Iso

Answer to blank 1: 100   [i.e., 175 - 75]

Answer to blank 2: $280   [i.e., 250 + 30]

Answer to blank 3: 50 [i.e., 150 - 100]

Under free trade:

Consumer Surplus = 0.5[(460 - 250) * 175] = $18,375

Producer Surplus = 0.5[(250 - 160) * 75] = $3,375

Under a tariff:

Consumer Surplus = 0.5[(460 - 280) * 150] = $13,500

Producer Surplus = 0.5[(280 - 160) * 100] = $6,000

Government revenue = $30 * 50 = $1500

	Under free trade ($)	Under a tariff ($)
CS	18,375	13,500
PS	3,375	6,000
GR	0	1,500

Answer to blank 4: Decreases

Answer to blank 5: 4,875 [i.e., 18,375 - 13,500]

Answer to blank 6: Increases

Answer to blank 7: 2,625 [i.e., 6000 - 3375]

Answer to blank 8: 1500 [i.e., $30 * 50]

Answer to blank 3: Decrease

Answer to blank 3: 2,250 [i.e., (18375 + 3375) - (13,500 + 6,000)]