3. Welfare effects of a tariff in a small country Suppose Kenya is open to free trade in the world market for wheat. Since Kenya is small relative to the international market, the demand for and supply of wheat in Kenya have no impact on the world price. The following graph shows the domestic market for wheat in Kenya. The world price of a ton of wheat is Pw = $400. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS). (? PRICE (Dollars per ton) 1200 Domestic Demand 1100 1000 900 800 700 600 500 400 300 Domestic Supply X 200 0 20 40 60 100 120 140 160 180 80 QUANTITY (Tons of wheat) 200 CS PS Because Kenya participates in international trade in the market for wheat, it will import tons of wheat. Now suppose the Kenyan government decides to impose a tariff of $200 on each imported ton of wheat. Under the tariff, the price Kenyan consumers pay for a ton of wheat becomes $ and Kenya will import tons of wheat.

3. Welfare effects of a tariff in a small country Suppose Kenya is open to free trade in the world market for wheat. Since Kenya is small relative to the international market, the demand for and supply of wheat in Kenya have no impact on the world price. The following graph shows the domestic market for wheat in Kenya. The world price of a ton of wheat is Pw = $400. On the following graph, use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) when the economy is at the free-trade equilibrium. Then, use the purple triangle (diamond symbols) to shade the area representing producer surplus (PS). (? PRICE (Dollars per ton) 1200 Domestic Demand 1100 1000 900 800 700 600 500 400 300 Domestic Supply X 200 0 20 40 60 100 120 140 160 180 80 QUANTITY (Tons of wheat) 200 CS PS Because Kenya participates in international trade in the market for wheat, it will import tons of wheat. Now suppose the Kenyan government decides to impose a tariff of $200 on each imported ton of wheat. Under the tariff, the price Kenyan consumers pay for a ton of wheat becomes $ and Kenya will import tons of wheat.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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