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 oranges in Guatemala. The world price (Pw) of oranges is $820 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 oranges and that there are no transportation or transaction costs associated with international trade in oranges. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place 2 1 2 1270 Domestic Demand Domestic Supply 1170 1120 1070 1020 970 a 920 870 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Tons of oranges)

Explanation / Answer

Without any restrictions, it will import 450-50= 400 tons of oranges.

A tariff of 100 per ton will achieve this.

A tariff of 100 will increase the price to 920 at which quantity demanded is 350 and quantity supplied is 150. Imports = 350-150= 200

A tariff set at this level would raise 100*200= 20000 in revenue

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