Suppose the world prices of kiwi fruit us $20 per case and the U.S. equilibrium price with no international trade is $35 per case. If the US government had previously banned the import of kiwi fruit but then imposed a tariff of $5 per case and allowed kiwi imports, what would happen to the equilibrium price and quantity of kiwi fruit consumed in the United States?
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When the import of kiwi fruit was banned, consumers in the US had to pay $35 per case of kiwi fruit. As the world price is $20 and import is allowed into the US with a $5 tariff, US consumers would have to pay only $25 per case. The 28% drop in cost will increase demand and more of the fruit would be consumed in the US.
With time however, the world price would rise due to an increase in demand from the US. This would also lead to an increase in the price paid by the US consumer. Also, the price of local kiwi fruit grown in the US would drop as there is a decrease in consumption for the local fruit now that consumers can get the same at a reduced price from the international market.
If this situation were to occur, the drop in price of kiwi fruit would mean that demand would soar, resulting in more kiwi fruit being eaten in the United States as people buy kiwi fruit instead of other fruit because it is cheaper. The decrease of the equilibrium price is therefore directly related to demand.
Presumably, the price of a case of kiwi in the US would drop from $35 to $25 (the world price plus the tariff). So, obviously the equilibrium price has dropped. We know that the law of demand tells us that (all other things being equal) a drop in the price will lead to a greater quantity demanded. This means that the equilibrium quantity should rise.
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