Answer to Question #221618 in Microeconomics for Fastcar

Question

Suppose that, as part of an international trade agreement, the U.S. government reduces the tariff on imported coffee. Will this affect the supply or the demand for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.

Answer 1

A reduction in tariffs leads to a decreased cost of production and therefore the cost of coffee imported is relatively lower. This thereby leads to an increase in the demand for coffee due to lowered prices.

An increase in Demand for coffee will therefore encourage more importation of coffee thereby an increase in the amount import

The equilibrium quantity and price changes thereby changing the equilibrium points as the market as to adapt to the new changes in prices and quantity.

S1 initial Supply curve

S2 current Supply curve

D demand curve

P1 initial Price

P2 Current Price

E1 initial equilibrium

E2 Current equilibrium

Q1 Initial quantity supplied

Q2 current quantity supplied