In a two-country world, the terms-of-trade impact of a tariff will definitely improve the welfare of the tariff-imposing country (assuming no retaliation) if the tariff-imposing country
A) is a small country.
B) already has a tariff rate that is greater than the "optimum" tariff rate.
C) is situated in the "elastic" portion of its trading partner's offer curve.
D) is situated in the "inelastic" portion of its trading partner's offer curve.

Question

Quizplus · Accepted Answer

If the tariff-imposing country is located in the "inelastic" portion of its trading partner's offer curve, this means that the quantity of imports from that trading partner will not decrease much in response to the tariff. As a result, the tariff-imposing country can increase its terms of trade (the ratio at which it can exchange its exports for imports) without significantly reducing its imports. This will improve the welfare of the tariff-imposing country, as it can obtain more imports for the same amount of exports. A and B are incorrect because the size of the country and the existing tariff rate do not necessarily determine the impact of a tariff on welfare. C is also incorrect because being situated in the "elastic" portion of the trading partner's offer curve means that the quantity of imports will decrease significantly in response to the tariff, which will not necessarily improve the welfare of the tariff-imposing country.

In a Two-Country World, the Terms-Of-Trade Impact of a Tariff