The world price of rice is currently $450 per metric ton. Assume that South Kore
ID: 1140851 • Letter: T
Question
The world price of rice is currently $450 per metric ton. Assume that South Korea is currently charging a $100 per metric ton tariff on imported rice. Assume that currently South Korean rice consumption is three million metric tons, South Korean rice production is 2.9 million metric tons, and South Korean rice imports are 100,000 metric tons. Economic analysts predict that if South Korea eliminates the $100 per metric ton tariff, then South Korean consumption of rice will rise to four million metric tons, and South Korean rice production will fall to two million metric tons. Analysts also believe that if South Korea removes the tariff, that will cause the world price of rice to rise from $450 per metric ton to $475 per metric ton. Use this information to answer the first seven questions. First, what is the current price of rice (per metric ton) in South Korea? QUESTION 2 What will the price of rice be in South Korea if it eliminates the tarif? QUESTION 3 What would the change in consumer surplus be in South Korea if it eliminates the tariff? If the change is negative (CS goes down), put a minus in front. If CS goes up, it is a plus. Express in millions of dollars.Explanation / Answer
(Question 2) Price = $450
Before tariff, South Korean free trade price equaled the world price of $450. With $100 tariff, post-tariff price was $(450 + 100) = $550, so after tariff removal, price is $450.
(Question 3) Change in consumer surplus = +$350 million
With tariff, domestic demand = 3 million MT at price of $550.
Without tariff, domestic demand = 4 million MT at price of $450.
Change in consumer surplus = (1/2) x Unit tariff x (Demand with tariff + Demand without tariff)
= (1/2) x $100 x (3 + 4) million
= $50 x 7 million
= $350 million
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