Question

4. Effects of a tariff on international trade

The following graph shows the domestic supply of and demand for oranges in Zambia. The world price (PWPW) of oranges is $780 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.

If Zambia is open to international trade in oranges without any restrictions, it will import _______  tons of oranges. 

Suppose the Zambian government wants to reduce imports to exactly 120 tons of oranges to help domestic producers. A tariff of $_______  per ton will achieve this.

A tariff set at this level would raise $_______  in revenue for the Zambian government.

Answer 1

If zambia is open to international trade in oranges without any restrictions, it will import 180 tons of oranges which is the difference between domestic demand and domestic supply.

If the zambian government wants to reduce imports to exactly 120 units then a tariff of $100 per ton will achieve this. By tariff of $100 the price will be $880 where the total quantity is 180 tons which includes domestic production of 60 tons and import of 120 units.

A tariff set at this level would raise $18000 in revenue for the Zambian government.