4. Effects of a tariff on international trade The following graph shows the dome

Question

4. Effects of a tariff on international trade The following graph shows the domestic supply of and demand for soybeans in Honduras. 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 950 Domestic Demand Domestic Supply 750 700 ?650 a 600 1 450 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Tons of soybeans)

Explanation / Answer

If Hundras is open to international trade in soyabeans without any restrictions, then it will trade on the world price and world price is $550.

At this price, domestic demand is 400 units and supply is 100 units.

It means there is excess demand and it will be fulfilled by importing 300 tons of soyabeans.

quantity of imports=300 tons of soybeans.

Now if this country wants to reduce imports to exactly 200 tons of soyabeans to help domestic producers.

So a tariff of $50 per ton will achieve this.

This tariff would raise tax revenue to Honduran government

=Tariff*quantity of imports

=$50*200

=$10,000

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