ib-economics-quantitative

1. Add the world supply curve if foreign producers are prepared to supply cooking oil at$0.50. Then show the effect on the diagram of the government putting a tariff of$0.50 on all imports of cooking oil.This is simple and you just have to add a perfectly elastic supply curve to thediagram, at a price of $0.50. and label it S World .Then you put on another curve, $0.50 above the first one and label it S World + Tariff.2. Identify the level of domestic production before the tariff and after.Before the tariff, domestic production is where the domestic supply curve meets theworld supply curve, i.e. 500,000 litres.After the tariff, domestic production is where the domestic supply curve meets theworld supply + tariff curve, i.e. 1 million.3. Calculate the amount of revenue for domestic producers before the tariff and after.Before the tariff, domestic producers received 500,000 x 50c = $250,000.After the tariff, domestic producers received 1 million x $1 = $1 million.4. Identify the level of imports before the tariff and after.Before the tariff, imports start at the level of output where the domestic supply curvemeets the world supply curve, i.e. 500,000 litres, and finish where the world supplycurve equals demand, i.e. at 2.5 million litres. Thus the level of imports is 2.5 million– 500,000 = 2 million litres.After the tariff, imports start at the level of output where the domestic supply curvemeets the world supply + tariff curve, i.e. 1 million litres, and finishes where the worldsupply + tariff curve equals demand, i.e. at 2 million litres. Thus the level of importsis 2 million – 1 million = 1 million litres.5. Calculate the amount of revenue for foreign producers before the tariff and after.Before the tariff, foreign producers received 2 million x 50c = $1 million.After the tariff, foreign producers received 1 million x 50c = $500,000.6. Calculate the amount of government revenue from the tariff.The government will receive 50c for each litre of oil that is imported after the tariff isput in place = 1 million x 50c = $500,000.Produced by Ian Dorton & Jocelyn Blink Page 57