Question

INTERNATIONAL TRADE

This question examines the market for bananas. You will use the quantity demanded and the quantity supplied at different prices to identify the equilibrium price. Additionally, you will investigate the role of international trade when the world price is below the market equilibrium price and analyze the impact of a tariff.

              

Below, you are provided with the quantity of bananas demanded and supplied. This data is obtained from points on the demand and supply curves in the market for bananas.

Price (dollars per pound)	Quantity of Bananas Demanded (pounds)	Quantity of Bananas Supplied (pounds)
$   2	18	8
$   4	15	10
$   6	12	12
$   8	9	14
$10	6	16

Task 1: Assume that the market is not open to trade. What is the equilibrium price of a pound of bananas? At this price, what is the quantity of bananas demanded and what is the quantity of bananas supplied?

Task 2: Assume that the market is open to trade and that the world price is $2. At this price, what is the quantity of bananas demanded by domestic consumers and what is the quantity of bananas supplied by domestic producers?

Task 3: Assuming that the market is open to trade and that the world price is $2, does this country import or export bananas? How many?

Task 4: Assume that the market is open to trade, the world price is $2, and the government imposes a tariff on imports of bananas of $2 per pound. At this world price and tariff amount, what is the quantity of bananas demanded by domestic consumers and what is the quantity of bananas supplied by domestic producers?

Task 5: Assuming that the market is open to trade, the world price is $2, and there is a $2/pound tariff on bananas, does this country import or export bananas? How many?

Task 6: When the government places a tariff on imports, do larger tariffs lead to more or less imports?

Task 7: What is the maximum tariff that the government could impose in this banana market before domestic consumers would stop importing bananas?

** Please give answers to all questions.

Answer 1

1.When the market is not open to international trade, equilibrium would be established at a point where the demand and supply are equal.

At equilibrium price of $6 demand=supply=12.

2.At a price of $2 the quantity demanded is 18 and the quantity supplied is 8.

3.Since,the quantity demanded>quantity supplied the country would import 10 units.

4.When tariff is $2 is imposed,the world price rises by $2.The world price is $4 now.At $4 demand is 15 and supply is 10.

5.This country imports because the world price is still less than domestic price and quantity demanded >quantity supplied.

6.Tariff reduces imports because the price rises after imposition of imports and when price rises, quantity demanded falls and hence,import falls.

7.The maximum tariff that could be imposed is $4.At this this price the world price becomes equal to the domestic price and the imports becomes 0.

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