Home Marketa Foreign Market Price, P Price, P Price, P xS SA MD 12 Quantity, Qua

Question

Home Marketa Foreign Market Price, P Price, P Price, P xS SA MD 12 Quantity, Quantty, CQ Quantity, C The laft- and right-hand figures given above show, respectivaly, the Home and Foreign markets for com. The center figura shows the world corn market, containing Home's import demand (MD) and Foreign's export supply (XS) 1) In the absenca of both transportation costs and artificia tade barriers, Home will A, produce 4 million tons at S6 and import 2 million tons at $6 per ton O B. produce 4 milion tons and import 2 milion tons, with both priced at S6 per ton. ( C. produce 3 million tons and import 2 million tons, with both priced at S8 per ton. D. prod 3 mitons and import 2 min tans, with both priced at S5 per ton. 2) Now suppose that Homes govarnment buckles undar political pressure from domestic corn producers and imposes a 32 per ton tanif on imported corn. The rasult for the Home markat is O A. the elimination of imports and the restoration of S8 as the price par ton of com. B. imparts of 2 million tons and dormestic praduction of 4 million tans, with both priced at $8 per torn C. the elimination of imports with the price holding steady at S6 per ton. O D. a reduction of imports to 1 million tons and an increase in prics to $7 per ton

Explanation / Answer

Before the import, the price of the corn in the home market was $8 and the total amount demanded was 4. The market was at equilibrium at this price and quantity i.e. the quantity demanded and quantity supplied was the same.

After the home country started to import the demand increased to 5 and the price decreased to $6 at this price home production is 3 and demand are 5 showing an import of 2. If the tariff of $2 is added to this the price will again increase to $8. At this price, the demand will fall back to 4 and there will be no imports as the local producer will be able to fulfill the demand just as they were doing before the import started.

The correct answer to this question is "A".

  

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