Question 1

The following diagram shows a "reaction function" graph for two firms selling in an export market, where HH is the home firm's reaction function and FF is the foreign firm's reaction function. Reaction function HH reflects the fact that, if the foreign firm increases its quantity sold in this market, then the home firm will __________ its sales level in the market; reaction function FF reflects the fact that, if the home firm increases its quantity sold in this market, the foreign firm will __________ its sales level in the market.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Accepted Answer

A

Question 2

Would it be possible for the infant industry argument to be applicable to a perfectly-competitive industry? Why or why not?

Accepted Answer

The infant industry argument is the economic rationale for protecting new and emerging industries from foreign competition in order to give them time to develop and become competitive. This argument is typically used in the context of industries that are not yet mature and may not be able to compete with established foreign industries.

In a perfectly-competitive industry, there are many firms producing identical products and no single firm has the power to influence the market price. In this type of industry, there is no room for protectionism or government intervention to support infant industries. The principles of perfect competition dictate that new firms can enter the market freely and compete on an equal footing with existing firms.

Therefore, it would not be possible for the infant industry argument to be applicable to a perfectly-competitive industry. The very nature of perfect competition means that there are no barriers to entry and new firms are able to compete without the need for protectionist measures. In a perfectly-competitive industry, the market forces of supply and demand determine the success or failure of firms, and there is no need for government intervention to support infant industries.

Question 3

Why might a foreign export subsidy decrease welfare in the foreign country? Why might the foreign country provide such a subsidy despite the adverse welfare effect?

Accepted Answer

A foreign export subsidy might decrease welfare in the foreign country because it can lead to overproduction and a surplus of goods in the domestic market. This can drive down prices and hurt domestic producers, leading to job losses and decreased income for those in the industry. Additionally, the subsidy can distort the market and lead to inefficient allocation of resources, ultimately reducing overall welfare in the foreign country.

Despite the adverse welfare effect, the foreign country might provide such a subsidy in order to support its domestic industries and maintain a competitive edge in the global market. By subsidizing exports, the country can lower the cost of its goods for foreign consumers, making them more attractive and competitive in international trade. This can help the country maintain or increase its market share and boost its overall economic growth, even if it comes at the expense of domestic welfare. Additionally, providing export subsidies can be a strategic move to retaliate against trade barriers or subsidies imposed by other countries, in an effort to protect its own industries and maintain a strong position in the global economy.

Question 4

In the situation in the diagram in Question #14 above, the loss of consumer surplus for home consumers because of the imposition of the tariff is __________.
A) $4
B) $56
C) $121
D) $224

Accepted Answer

The loss of consumer surplus for home consumers due to the imposition of a tariff is represented by the area between the domestic supply curve, the demand curve, and the new price level after the tariff. This area typically includes the triangle that represents the increased price paid on the previously purchased quantity and possibly some rectangles representing the tariff revenue on the imported goods. Without seeing the specific diagram, the correct answer is based on common outcomes in such scenarios. $56 is a plausible amount for the loss in consumer surplus in a diagrammatic representation of a market affected by a tariff, as it reflects the combined effect of higher prices and reduced consumption.

Question 5

In the model relating R&D spending to output and output to R&D spending, suppose that, for whatever autonomous reason, the home firm desires to spend more on R&D at each level of output. In this model, what does this greater R&D spending by the home firm do to R&D
spending by the foreign firm? Why? Does this result conform to your expectation of foreign firms' reactions in practice to increased R&D spending by home firms? Explain.

Accepted Answer

The answer of In the model relating R&D spending to...

Question 6

Why do you suppose that "reaction functions" are not used in analyzing the market structure of perfect competition (or even monopolistic competition)? If you were to draw reaction functions for any home firm and any foreign firm engaged in perfect competition, what would the functions look like?

Accepted Answer

The answer of Why do you suppose that "reaction functions"...

Question 7

How would you respond to an argument to impose a tariff on imports arriving from a particular country in order to improve the balance of trade with that particular country? Do the criticisms of the tariff to improve the overall trade balance with all partners apply in this bilateral context? Why or why not? Are there additional considerations to be taken into account? Explain.

Accepted Answer

The answer of How would you respond to an argument...

Question 8

A tariff placed upon a product in order to offset a foreign export subsidy is called
A) an antidumping duty.
B) a countervailing duty.
C) a predatory duty.
D) a specific duty.

Accepted Answer

A countervailing duty is a tariff placed upon a product in order to offset a foreign export subsidy. This helps to ensure fair competition in the international market. Antidumping duty is a tariff placed to counteract the sale of a product at a lower price in the importing country than the price charged in the exporting country. Predatory duty is not a recognized term in trade policies. Specific duty is a tariff based on the weight or quantity of the imported product, not related to export subsidies.

Question 9

In the situation of the "tariff to extract foreign monopoly profit," do you think that the existence of a home producer of the good would strengthen or weaken the case for protection from the standpoint of the impact on home country welfare? Explain.

Accepted Answer

The answer of In the situation of the "tariff to...

Question 10

It is noted in the text that the infant industry argument is more frequently used in developing countries than in developed countries. Why might this be the case? Does this necessarily have to be the case?

Accepted Answer

The answer of It is noted in the text that...

Question 11

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.

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.

Question 12

In the "reaction function" diagram of Question #18 above, if the firms are at point A and if both firms are seeking to maximize profit, the foreign firm wants to __________ its sales in this market, and the home firm __________its sales in this market.
A) decrease; also wants to decrease
B) decrease; wants to increase
C) increase; wants to decrease
D) increase; also wants to increase

Accepted Answer

The foreign firm wants to decrease its sales in this market because it is currently making a loss. The home firm wants to increase its sales in this market because it is currently making a profit.

Question 13

Remembering micro theory, why can it be assumed that home demand for the product of a foreign monopoly supplier (at the initial as well as the post-tariff point) is elastic? Even if the net welfare impact of the "tariff to extract foreign monopoly profit" is uncertain, why is it certain that home consumers will incur less total spending on the good after the imposition of the tariff than before the imposition of the tariff?

Accepted Answer

The answer of Remembering micro theory, why can it be...

Question 14

In the case of the economist's definition of "dumping," an exporting firm is selling its product at a __________ price in the importing country than in the exporter's home country, and this suggests that demand for the exporter's product is __________ in the exporting country than in the importing country.
A) higher; more elastic
B) higher; less elastic
C) lower; less elastic
D) lower; more elastic

Accepted Answer

The economist's definition of "dumping" defines it as an exporting firm selling its product at a lower price in the importing country than in the exporter's home country. This suggests that demand for the exporter's product is lower in the exporting country than in the importing country, as the exporter is willing to sell it at a lower price to make sales in the importing country. Additionally, the elasticity of demand in the exporting country is not relevant to the definition of dumping.

Question 15

(a) Assume that there are only two firms in an industry - a home firm and a foreign firm - and that the firms are competing in third-country markets. (You can have them competing in each other's domestic markets if you wish.) Explain a "reaction function diagram" for the two firms, including the definition of a "reaction function" in this context and a brief discussion of why the reaction functions slope as they do (although you do not need to derive the functions formally). Then use a reaction function diagram (possibly along with other diagrams) to explain how a "strategic trade policy" action by the home firm's government can potentially enhance the home firm's market share in third-country markets.
(b) Briefly explain, in a two-country setting, how tariff reaction functions of the two governments can be constructed. Then, in a broader context, briefly indicate why this type of "game" can lead to a need for multilateral trade negotiations (such as those sponsored by GATT/WTO).

Accepted Answer

The answer of (a) Assume that there are only two...

Question 16

In the "reaction function" diagram of Question #18 above, if economies of scale exist for both firms, then protection instituted in the home market to keep out the foreign firm's product will, other things equal, cause HH to shift to the __________.
A) left (or downward) and also will cause FF to shift to the left (or downward)
B) left (or downward) and will cause FF to shift to the right (or upward)
C) right (or upward) and also will cause FF to shift to the right (or upward)
D) right (or upward) and will cause FF to shift to the left (or downward)

Accepted Answer

The answer of In the "reaction function" diagram of Question...

Question 17

In the situation in the diagram in Question #14 above, the amount of former foreign monopoly profit that has been transferred as revenue to the home country's government because of the imposition of the tariff is __________.
A) $52
B) $104
C) $120
D) $390

Accepted Answer

The amount of former foreign monopoly profit transferred to the home country's government as revenue due to the tariff imposition is calculated by the area representing the tariff revenue. This area is typically found by multiplying the tariff rate by the quantity of imports after the tariff imposition. Without the specific diagram, the exact calculation process can't be detailed, but the correct answer is identified as $104, suggesting this amount represents the tariff revenue gained by the home country's government, which was previously part of the foreign monopoly's profit.

Question 18

Illustrate and explain how a country could attain its optimum tariff position (optimum terms of trade) on the foreign offer curve by using an import quota rather than a tariff. Could this position also be attained by negotiation of a "voluntary" export restraint (VER) with the foreign country rather than by the use of a tariff? Why or why not?

Accepted Answer

The answer of Illustrate and explain how a country could...

Question 19

The following diagram shows the demand and marginal revenue curves facing a foreign monopoly supplier of a good to the home country, as well as the firm's horizontal marginal cost curve when there is no tariff by the home country (MC) and the marginal cost curve when a specific tariff is imposed by the home country (MC + T). (Assume that average cost (AC) equals marginal cost.) In this situation, the price to home country consumers after the tariff has been imposed is __________.

A) $10
B) $14
C) $25
D) 27

Accepted Answer

The answer of The following diagram shows the demand and...

Question 20

Suppose that a relatively capital-abundant country is exporting the capital-intensive good and importing the labor-intensive good, but that the "specific-factors" model of Chapter 8 applies rather than the Heckscher-Ohlin model. Assess the effect on the return to labor of the imposition of a tariff on the labor-intensive good.

Accepted Answer

The answer of Suppose that a relatively capital-abundant country is...

Quiz 15: Arguments for Interventionist Trade Policies

Would it be possible for the infant industry argument to be applicable to a perfectly-competitive industry? Why or why not?

Why might a foreign export subsidy decrease welfare in the foreign country? Why might the foreign country provide such a subsidy despite the adverse welfare effect?

In the situation in the diagram in Question #14 above, the loss of consumer surplus for home consumers because of the imposition of the tariff is __________.

Why do you suppose that "reaction functions" are not used in analyzing the market structure of perfect competition (or even monopolistic competition)? If you were to draw reaction functions for any home firm and any foreign firm engaged in perfect competition, what would the functions look like?

A tariff placed upon a product in order to offset a foreign export subsidy is called

In the situation of the "tariff to extract foreign monopoly profit," do you think that the existence of a home producer of the good would strengthen or weaken the case for protection from the standpoint of the impact on home country welfare? Explain.

It is noted in the text that the infant industry argument is more frequently used in developing countries than in developed countries. Why might this be the case? Does this necessarily have to be the case?

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

In the "reaction function" diagram of Question #18 above, if the firms are at point A and if both firms are seeking to maximize profit, the foreign firm wants to its sales in this market, and the home firm its sales in this market.

In the case of the economist's definition of "dumping," an exporting firm is selling its product at a price in the importing country than in the exporter's home country, and this suggests that demand for the exporter's product is in the exporting country than in the importing country.

In the "reaction function" diagram of Question #18 above, if economies of scale exist for both firms, then protection instituted in the home market to keep out the foreign firm's product will, other things equal, cause HH to shift to the __________.

In the situation in the diagram in Question #14 above, the amount of former foreign monopoly profit that has been transferred as revenue to the home country's government because of the imposition of the tariff is __________.