5. Variable levies Aa Aa The following graph shows the market for wheat in the E

Question

5. Variable levies Aa Aa The following graph shows the market for wheat in the European Union (EU). The world price of wheat is $2.00 per bushel, and the world supply is SWorld. To support the agricultural sector, the EU guarantees a certain price for the farmers by imposing a variable levy of $2.00 per bushel to limit the import of wheat PRICE (Dollars 10.00 9.00 8.00 Support Price EU 6.00 5.00 4.00 3.00 orld WorldNew 0.00 6000 12000 18000 24000 30000 WHEAT (Bushels Help Clear All On the graph, use the purple line (diamond symbols) to draw the support price the farmers receive due to the levy Fill in the following table by entering the quantities for production and imports of wheat in the EU before the levy and after the levy Before the Levy (Bushels) 6,000 18,000 After the Levy (Bushels) 12,000 6,000 Production Imports

Explanation / Answer

Then levy on import competing sector goods increases the price received by the domestic producers.nBut it does not alters the world price and supply. Thus the domestic demand remains the same at world price. Only domestic producers' supply more than before.

In this case a levy of $2 increases the price received by the domestic producers up to $4. At this price domestic production rises to 12000 units. The domestic demand at world prices is 24000. Then import with levy is 12000 units.

Suppose now world price decreases to $1. At this price domestic demand increases to 27000 units. Then the price received by the producers decreases to $1+$2(levy)=$3. At this price the producers supply 9000 units in domestic market.Then the imports now becomes (27000-9000)=18000 units. This is exactly the amount imported without levy. Then the effective price is $2. Then the tariff is ($2-$1)=$1.

The foreign producers can reach the level before any levy by cutting the prices. Then the correct option is

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