Perfect Competition and Trade
Consider the perfectly competitive market of quinoa (a type of grain), in the country of Peru.
Peru is currently close to trade to the rest of the world. In the domestic market for quinoa in
Peru, the equilibrium price is 5 per kilo, customers purchase 5 million kilos, and the elasticity
of demand and supply are -6 and 2 respectively.
a) Suppose that the government of Peru imposes a tax of 1 per kilo on quinoa. What is
the percentage of the tax born by consumers? How much is the reduction in quantity
traded as a result of the tax?
b) Peru is thinking of opening to trading with the rest of the world. Suppose that as a
result of opening trade, exports amount to 2 million units. What is the reduction in
local consumption by Peruvian customers as a result of opening trade?
c) Suppose that the government is considering one of the two options to increase
revenue (either a tax, or opening trade). If the government cannot subsidize (or
compensate) Peruvian consumers, which option do Peruvian consumers prefer?
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