Answered: PRICE (Dollars per ton) 1280 Domestic…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose Guatemala is open to free trade in the world market for oranges. Because of Guatemala’s small size, the demand for and supply of oranges in Guatemala do not affect the world price. The following graph shows the domestic oranges market in Guatemala. The world price of oranges is PWPW=$800 per ton.

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).

1. If Guatemala allows international trade in the market for oranges, it will import _____ tons of oranges.

2. Now suppose the Guatemalan government decides to impose a tariff of $120 on each imported ton of oranges. After the tariff, the price Guatemalan consumers pay for a ton of oranges is _____ and Guatemala will import _____ tons of oranges.

3. Show the effects of the $120 tariff on the following graph.

Use the black line (plus symbol) to indicate the world price plus the tariff. Then, use the green triangle (triangle symbols) to show the consumer surplus with the tariff and the purple triangle (diamond symbols) to show the producer surplus with the tariff. Lastly, use the orange quadrilateral (square symbols) to shade the area representing government revenue received from the tariff and the tan triangles (dash symbols) to shade the areas representing the net loss or deadweight loss (DWL) caused by the tariff.

4. Complete the following table to summarize your results from the previous two graphs.

	Under Free Trade	Under a Tariff
(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus
Government Revenue	0

Based on your analysis, as a result of the tariff, Guatemala's consumer surplus____by $______ producer surplus ______ by $_____ and the government collects $______ in revenue. Therefore, the net welfare effect is a _____ of $________