Question

(Scenario: Sugar Trade in Birdonia) In autarky, suppose that equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation. Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per ton. What action must the government of Birdonia take to ensure that Birdonians do not import sugar at the world price of $125?

Answer 1

Answer:

The government of Birdonia should do nothing.

Explanation:

Equilibrium sugar price of $100 means that at that price($100), more people are willing to buy sugar. Also more firms are willing to supply the commodity at that price.

Hence since consumers are considered rational, they will want to go for a higher value at minimal cost. Opting for imported sugar at $125 is the least the Birdonian citizen will do.