9 In the Australian market for wine the domestic supply and

(9) In the Australian market for wine, the domestic supply and domestic demand of wine obey the laws of supply and demand, respectively. The world price of wine is $45 per bottle Suppose that the Australian market for wine is too small to affect the world price of wine If there was no international trade in wine, the equilibrium price of wine in Australia would be $60 per bottle If Australians are free to buy and sell wine on the international market (a) Australia would export wine and the price of wine in Australia would be $60 (b) Australia would export wine and the price of wine in Australia would be $45 (c) Australia would import wine and the price of wine in Australia would be $60 (d) Australia would import wine and the price of wine in Australia would be $45. (10) Refer to scenario described in Question (9). Suppose Australians are free to buy and sell wine on the international market but the Australian government decided to impose a tariff per unit import tax) on wine imported from other countries. We would expect (a) nothing to happen (b) Australian wine exports to decrease and Australian wine producer surplus to decrease (c) Australian wine imports to decrease and Australian wine producer surplus to increase. (d) Australian demand for wine to increase and Australian consumer surplus to increase

Solution

(9) (d)

If a country\'s market equilibrium price is higher (lower) than the free-trade world price, that country will import (export) the good at the world price (domestic price).

(10) (c)

A tariff will increase price higher than $45, and at this higher price, domestic demand will fall, domestic supply will rise, imports (= domestic demand - domestic supply) will fall and producer surplus (= area between market (after-tariff) price and supply curve) will rise.