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 wheat in Bangladesh. The world price (Pw) of 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 wheat and that there are no transportation or transaction costs associated with international trade in wheat. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 405 Domestic Demand 385 365 Domestic Supply : 345 325 305 285 265 245 225 205 -+ o so 100 150 200 250 300 350 400 450 500 QUANTITY (Bushels of whea

Explanation / Answer

The international price is $245. At this price, the domestic demand in Bangladesh is 400 bushels and domestic supply is 100 bushels. So, Bangladesh will import 400 - 100 = 300 bushels of wheat.

Import can be restricted to 100 when the price is such that the domestic demand exceeds domestic supply by 100. This happens when the price is $285 per bushel. So, a tariff of 285 - 245 = $40 needs to be imposed.

Tariff per bushel = $40 and total import = 100 bushels. Total revenue = 100 * $40 = $4000

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