A. China has more resources to produce textiles than the United States. B. China

Question

A. China has more resources to produce textiles than the United States. B. China has a comparative advantage over the United States in producing textiles. C. The United States cannot produce enough textiles to satisfy its domestic demand.
The following calculator shows the domestic supply of and demand for wheat in Bolivia. Bolivia is open to international trade of wheat without any restrictions. The world price of wheat is $150 per ton and is represented by the horizontal brown 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 the international trade in wheat. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 2. Given this information, Bolivia will import _____ tons of wheat. A. 150,000 B. 450,000 C. 50,000 D. 350,000 E. 250,000 F. 400,000 G. 200,000 H. 300,000 I. 100,000
3. Suppose the Bolivian government wants to set a tariff on wheat that would reduce imports to 100,000 tons. Which of the following tariffs would achieve this? A. A tariff of $200 per ton B. A tariff of $50 per ton C. A tariff of $100 per ton D. A tariff of $150 per ton
4. A tariff set at the level you selected in the previous section would raise _______ in revenue for the Bolivian government. A. $18.75 million B. $80 million C. $20 million D. $15 million E. $45 million F. $56.25 million PRICE (Dollars per ton) 600 550 500 CALCULATOR Prices per ton] 400 Dellars per ton Domestic Demand Thousands ef tons Domestic Sup Thousands of tens 400 350 300 250 200 501 100 0 100 200 300 400 500 QUANTITY IThousands of tons of wheat

Explanation / Answer

According to the Ricardian trade model, the countries engaged in trade specializes in the product in which they had comparative advantage. So, the country specializes on that good would employ all of its resources in the production of that good only, and so would export that good while importing the other good in a 2 good, 2 country model.

Therefore, according to the Ricardian model, the $7 billion worth of import of textiles of US from China would tell us that China has comparative advantage on poducing textiles over US.

2. At the world price of $150 per ton, Bolivia would face a domestic demand of 450,000 tons, whereas the domestic suppliers would be able to supply only 50,000 tons of wheat at this price. Therefore, if Bolivia matches the domestic price with that of the world price, then they would gave to import (450,000 - 50,000) = 400,000 tons of wheat from the world.

Option F would be the correct answer.

3. If the Bolivian government decides to put a tariff on wheat to restrict the import to 100,000 tons, then we could say that the after the government's tariff imposition the domestic price should be such that there remains an excess demand of 100,000 tons of wheat which they import.

From the diagram we could see that at price $300 per ton the domestic supply increases to 200,000 tons and the domestic demand reduces to 300,000 tons of wheat, which gives us an excess demand of 100,000 tons which Bolivia could import from the outside world.

Therefore, the government needs to raise the price from $150 to $300 per ton in order to restrict the import at 100,000 tons wheat. So, the government would impose a tariff of $150 per ton to achieve its objective.

Hence, option D would be the right answer.

4. Because of the imposition of tariff, the Bolivian government would earn the revenue for 100,000 tons of import is, $150 * 100,000 = $15 million.

So, option D would be our answer.

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