Question

Draw a graph with the following information: The world price of soybeans is $2.00 per bushel with a domestic supply of 60 Q/million bushels and a domestic demand of Q/millions bushels. The importing country is small enough not to affect the world price.

A. Suppose government puts a tariff of $0.25 per bushel on soybean imports. How much will the tariff reduce imports? Draw the new graph.

B. Given a tariff of $0.25 per bushel on soybean imports, how much will domestic production increase?

C. How much revenue will the government raise from a $0.25 per bushel tariff on soybean imports?

Answer 1

The graph with the world price of soyabean is as follows:

  

With the world price below the equilibrium price, there is more demand (Q1) rhan supply (Q2). Quantity imported will be the shortage amount. That is, Q1 - Q2.

a) If the government levies a tariff of $0.25, the import will reduce from (Q1-Q2) to (Q3-Q4). the resulting graph is as follows:

b) Domestic production will increase from Q2 to Q4. So increased domestic prodution is Q4-Q2.

reason: Pw is the world price line. Pt is the price line with tariff. When tariff is introduced, price is higher than the world price. This will stimulate more domestic production. So, domestic production will incease from Q2 to Q4. On the other hand, due to higher rices, demand will fall from Q1 to Q3. So, post tariff imports will be Q3 - Q4.

c) The area of the rectangle between Pw and Pt and between Q4 and Q3 (labelled TR) is te tariff revenue for the gvernment.