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 maize in Panama. The world price (P) of maize is $240 per ton and is 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 maize and that there are no transportation or transaction costs associated with international trade in maize. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. 465 Domestic Demand Domestic Supply 390 65 40 15 290 24 0 0 203 100 QUANTITY (Tons of maize) If Panama is open to international trade in maize without any restrictions, it will import tons of maize. Suppose the Panamanian government wants to reduce imports to exactly 20 tons of maize to help domestic producers. A tariff ofper ton will achieve this. A tariff set at this level would raise in revenue for the Panamanian government.

Explanation / Answer

At $240 Domestic demand import will be 90-10 = 80

New Imports needs to be 20 tons = 315-240 = 75

Revenue raised = Tariff * Imports = 75*80 = 6000

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