Question 1

Free trade allows firms to realize economies of scale, resulting in higher costs of production.

Accepted Answer

Free trade allows firms to access larger markets and cheaper inputs, which can lead to lower costs of production and increased efficiency.

Question 2

The nation of Cranolia used to prohibit international trade, but now trade is allowed, and Cranolia is exporting furniture. Relative to the previous no-trade situation, buyers of furniture in Cranolia are now better off.

Accepted Answer

Allowing trade and exporting furniture means Cranolia is specializing in furniture production, likely increasing prices domestically as some of the supply is now directed to international markets, potentially making domestic buyers worse off due to higher prices.

Question 3

When a government imposes a tariff on a product, the domestic price will equal the world price.

Accepted Answer

When a government imposes a tariff on a product, the domestic price will increase and be higher than the world price in order to protect domestic producers from foreign competition.

Question 4

Suppose that Australia imposes a tariff on imported beef. If the increase in producer surplus is $100 million, the increase in tariff revenue is $200 million, and the reduction in consumer surplus is $500 million, the deadweight loss of the tariff is $300 million.

Accepted Answer

The sum of the gains (producer surplus and tariff revenue) is $300 million, but the reduction in consumer surplus is $500 million, meaning that there is a net loss to society of $200 million ($500 million - $300 million). This net loss is the deadweight loss of the tariff, not $300 million.

Question 5

If a country allows free trade and imports cars, then it is the case that the gains to domestic producers outweigh the losses to domestic consumers.

Accepted Answer

If a country allows free trade and imports cars, it can lead to lower prices for cars, which benefits domestic consumers. However, domestic producers may face increased competition and may see a decrease in profits. The overall impact on the domestic economy is a trade-off between the benefits and costs of free trade.

Question 6

Tariffs cause deadweight loss because they move the price of an imported product closer to the equilibrium without trade, thus reducing the gains from trade.

Accepted Answer

Tariffs increase the price of an imported product, reducing the quantity demanded and reducing consumer surplus. This creates a deadweight loss, as mutually beneficial trades are prevented, reducing the overall gains from trade.

Question 7

If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, the government will gain tariff revenue, and domestic consumers will gain consumer surplus.

Accepted Answer

While it is true that domestic sellers will gain producer surplus and the government will gain tariff revenue, domestic consumers will actually lose consumer surplus as they will have to pay higher prices for the imported good. This loss in consumer surplus may outweigh the gains in producer surplus and tariff revenue.

Question 8

When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off.

Accepted Answer

When a tariff is imposed on imported shoes, the cost of buying shoes in the country increases, making buyers worse off as they have to pay more for the same product. This also reduces competition in the market, allowing domestic shoe producers to raise their prices, further adding to the burden of consumers.

Question 9

Deadweight loss measures the decrease in total surplus that results from a tariff or quota.

Accepted Answer

This is the definition of deadweight loss - it represents the loss in total surplus caused by a distortion in the market, such as a tariff or quota.

Question 10

The nation of Spritzland used to prohibit international trade, but now trade is allowed, and Spritzland is exporting wristwatches. Relative to the previous no-trade situation, total surplus in the market for wristwatches in Spritzland has increased.

Accepted Answer

By allowing international trade, Spritzland is able to benefit from comparative advantage and produce wristwatches at a lower opportunity cost. This leads to an increase in supply, lower prices for consumers, and an increase in producer surplus. Overall, the increase in consumer and producer surplus leads to an increase in total surplus in the market for wristwatches in Spritzland.

Question 11

Import quotas and tariffs make domestic sellers better off and domestic buyers worse off.

Accepted Answer

Import quotas and tariffs limit the amount of goods that can be imported into a country or make imported goods more expensive, which reduces competition from foreign producers. This protectionism benefits domestic sellers by making it easier for them to sell their goods at higher prices. However, it also harms domestic buyers who have to pay more for the same goods, reducing their purchasing power and welfare.

Question 12

When a country that imports shoes imposes a tariff on shoes, buyers of shoes in that country become worse off and sellers of shoes in that country become better off.

Accepted Answer

When a country imposes a tariff on imported shoes, the price of imported shoes in that country increases, making them more expensive for buyers. This results in buyers becoming worse off. On the other hand, domestic shoe producers will become better off as their domestically produced shoes become more competitive due to the higher price of imported shoes.

Question 13

Import quotas and tariffs both cause the quantity of imports to fall.

Accepted Answer

Both import quotas and tariffs increase the cost of importing goods, making them less attractive to consumers and reducing the quantity of imports.

Question 14

Domestic consumers gain and domestic producers lose when the government imposes a tariff on imports.

Accepted Answer

When a government imposes a tariff on imports, domestic producers generally gain because the tariff offers them protection from cheaper foreign competition, potentially increasing their sales and market share. Conversely, domestic consumers tend to lose because the tariff increases the price of imported goods, making them more expensive and reducing consumer choice and purchasing power.

Question 15

For a given country, comparing the world price of aluminum and the domestic price of aluminum before trade indicates whether that country's demand for aluminum exceeds the demand for aluminum in other countries.

Accepted Answer

The comparison of world price and domestic price of aluminum before trade does not necessarily indicate the level of demand for aluminum in a country. Other factors like production, trade barriers, and government policies also influence the domestic price of aluminum.

Question 16

When a country abandons no-trade policies in favor of free-trade policies and becomes an importer of steel, then the domestic price of steel will increase as a result.

Accepted Answer

When a country becomes an importer of steel due to free trade policies, it means that they can now access steel from international markets at a lower price, which will actually decrease the domestic price of steel.

Question 17

Suppose Ecuador imposes a tariff on imported bananas. If the increase in producer surplus is $50 million, the reduction in consumer surplus is $150 million, and the deadweight loss of the tariff is $30 million, then the tariff generates $130 million in revenue for the government.

Accepted Answer

The tariff revenue for the government is calculated as the increase in producer surplus plus the deadweight loss minus the reduction in consumer surplus, which does not match the $130 million stated. The correct calculation for tariff revenue is based on the quantity of imports multiplied by the tariff rate, not directly derived from changes in surplus and deadweight loss.

Question 18

The imposition of a tariff on imported wine will increase the domestic price of wine, decrease the quantity of wine imported, and increase the quantity of wine produced domestically.

Accepted Answer

The imposition of a tariff will make imported wine more expensive for consumers, making them more likely to buy domestic wine, which will increase the demand and quantity of domestically produced wine. At the same time, the higher price for imported wine will decrease the quantity of imported wine demanded. All of this will lead to an increase in the domestic price of wine.

Question 19

A tariff increases the quantity of imports and moves the market farther from its equilibrium without trade.

Accepted Answer

A tariff raises the price of imports, which decreases the quantity of imports demanded and increases the quantity of imports supplied domestically. This leads to a reduction in imports and a movement towards the equilibrium without trade.

Question 20

If a tariff is placed on watches, the price of both domestic and imported watches will rise by the amount of the tariff.

Accepted Answer

This is because the tariff will increase the cost of production for both domestic and imported watches, which will be passed on to consumers in the form of higher prices.

Quiz 9: Application: International Trade