The question
Name: ______________________ Date: ____________ A small country opens its lentil market: comparative advantage, the gain from trade, imports and a tariff (10 points)
Castrel and Ostavia are invented countries. In one day, a worker in Castrel can produce either 4 tons of lentils or 8 bolts of cloth, and a worker in Ostavia can produce either 6 tons of lentils or 6 bolts of cloth. Castrel is a small country: its trade does not change the world price of lentils. In Castrel, the domestic market for lentils is competitive, with straight-line demand and supply curves, and without trade the price is $7 a ton.
Data
Lentils in Castrel
| Price per ton | Quantity demanded | Quantity supplied |
|---|---|---|
| $4 | 80 | 20 |
| $5 | 70 | 30 |
| $6 | 60 | 40 |
| $7 | 50 | 50 |
(A) Calculate the opportunity cost of 1 ton of lentils in each country, and identify which country has the comparative advantage in lentils. [2 points]
(B) Castrel opens to trade, and the world price of lentils is $4 a ton. Draw a correctly labeled graph of Castrel's lentil market and show the world price. [2 points]
(C) Shade the area that represents Castrel's gain in total surplus from opening to trade at the world price. [1 point]
(D) Using the table, calculate Castrel's lentil imports per day at the world price. Show your work. [1 point]
(E) Castrel then places a tariff of $1 a ton on imported lentils, so lentils sell in Castrel for $5. Calculate the tariff revenue per day. Show your work. [1 point]
(F) Shade the deadweight loss caused by the tariff. [1 point]
(G(i)) Using the table, calculate the deadweight loss caused by the $1 tariff. Show your work. [1 point]
(G(ii)) Explain why Castrel's lentil farmers support the tariff even though it lowers total surplus in Castrel. [1 point]