Question 1

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 that imports shoes imposes a tariff on shoes, it makes them more expensive for the buyers in that country. Therefore, buyers become worse off. On the other hand, sellers of shoes in that country become better off because they face less competition from foreign suppliers and can sell their shoes at a higher price.

Question 2

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

Accepted Answer

Deadweight loss is the loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto optimal, resulting in a reduction of total surplus. Tariffs and quotas can lead to deadweight loss because they create an artificial distortion in the market by limiting trade and, therefore, reducing consumer and producer surplus.

Question 3

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 total welfare loss from the tariff can be calculated as:

Welfare Loss = Reduction in Consumer Surplus + Reduction in Producer Surplus + Deadweight Loss
Welfare Loss = $150 million + ($50 million) + $30 million
Welfare Loss = $230 million

Therefore, the tariff revenue generated by the government would be:

Tariff Revenue = Welfare Loss - Reduction in Consumer Surplus
Tariff Revenue = $230 million - $150 million
Tariff Revenue = $80 million

Thus, the statement is false as the tariff revenue generated by the government would be $80 million, not $130 million.

Question 4

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

Accepted Answer

When a country imposes a tariff on shoes, it makes imported shoes more expensive for buyers in that country. This reduces the quantity of shoes demanded and raises the price. Therefore, buyers become worse off because they have to pay a higher price for shoes.

Question 5

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 and domestic price of aluminum only indicates the competitiveness of the country's aluminum industry, but it does not necessarily indicate the demand for aluminum. Other factors such as production efficiency, technology, and government policies can also affect the domestic price of aluminum, regardless of the demand for it.

Question 6

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

Accepted Answer

Both import quotas and tariffs are measures to restrict imports and protect domestic industries. They both make imports more expensive and less competitive with domestic products, which leads to a reduction in the quantity of imports.

Question 7

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

If a country becomes an importer of steel, it means that they are buying cheaper steel from other countries. This increased competition in the steel market will likely lead to a decrease in domestic steel prices, not an increase.

Question 8

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

Accepted Answer

Import quotas and tariffs increase the price of imported goods, which reduces the competition faced by domestic sellers. This allows them to charge higher prices and increase their profits. However, domestic buyers are worse off as they now have to pay higher prices for the same goods. Overall, domestic sellers benefit from import quotas and tariffs while domestic buyers suffer.

Question 9

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, leading to a reduction in demand and quantity traded. This reduction in trade leads to a deadweight loss, as the gains from trade that would have been realized in the absence of a tariff are not achieved.

Question 10

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 domestic sellers gain producer surplus and the government gains tariff revenue, domestic consumers lose consumer surplus because they have to pay higher prices for the imported goods.

Question 11

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

Accepted Answer

Free trade allows firms to benefit from comparative advantage and access to larger markets, which can result in lower costs of production and increased efficiency.

Question 12

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

Imports of cars will increase competition for domestic producers, which can lead to lower prices for consumers. However, domestic producers may face losses due to this competition. Therefore, the gains to domestic consumers could potentially outweigh the losses to domestic producers.

Question 13

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

Accepted Answer

A tariff increases the price of imports, which reduces the quantity of imports and moves the market closer to its equilibrium without trade. The tariff also increases domestic production and moves the market farther away from its equilibrium with trade.

Question 14

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

Allowing international trade leads to an increase in total surplus as it allows for specialization and comparative advantage, which can lead to lower production costs and access to a larger market. Thus, the market for wristwatches in Spritzland would likely experience an increase in total surplus due to the ability to export and engage in international trade.

Question 15

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 16

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 total welfare loss from the tariff is the sum of the deadweight loss and the reduction in consumer surplus, which in this case would be $800 million. The increase in producer surplus and tariff revenue do not factor into the calculation of the welfare loss.

Question 17

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

Tariffs are a form of protectionism that increase the cost of imported goods, making them less competitive with domestic products. By making imported wine more expensive, consumers are more likely to purchase domestically produced wine instead. Additionally, with a reduced demand for imported wine, there may be fewer imports and increased domestic production to meet the demand.

Question 18

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, it increases the price of the imported product, making it more expensive than the world price. Therefore, the domestic price will be higher than the world price.

Question 19

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 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 is a tax on all watches, regardless of whether they are produced domestically or imported. As a result, the increase in production costs will be passed on to consumers through higher prices for both types of watches.

Quiz 9: Application International Trade: Part B