Question 1

Consumer surplus is:

Accepted Answer

Consumer surplus is the difference between what consumers are willing to pay for a product and what they actually pay. It represents the benefit consumers receive from purchasing a product at a lower price than they were willing to pay. Option A is incorrect because it only considers the last unit purchased, while consumer surplus applies to all units purchased. Option C is incorrect because it relates to a discounted price and not consumers' valuation. Option D is incorrect because it confuses consumer surplus with producer surplus.

Question 2

China is now a member of the World Trade Organization. For China, one of the benefits of WTO membership is:

Accepted Answer

One of the benefits of China's WTO membership is the ability to impose antidumping duties on its imports. This means that China can take action against foreign companies that are selling goods in China at unfairly low prices, which can harm China's domestic industries. This is an important tool for protecting China's economic interests and ensuring that its industries can compete fairly in the global market.

Question 3

The difference between the price consumers are willing to pay and the price that they actually pay is known as:

Accepted Answer

Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a product and the actual price they pay. It represents the value that consumers receive beyond what they paid for. Price discrimination refers to charging different prices to different consumers based on their willingness to pay. Government surplus is the difference between the price the government pays for a good or service and the minimum price that producers are willing to accept. Producer surplus is the difference between the minimum price a producer is willing to accept for a product and the price they actually receive.

Question 4

One interpretation of producer surplus is that it equals:

Accepted Answer

Producer surplus is the return to the fixed factors of production in an industry, representing the difference between what producers are willing to accept for a good versus what they actually receive.

Question 5

(Figure: Consumer Surplus) When the price of the product is $15, the consumer surplus is:

Accepted Answer

The answer of (Figure: Consumer Surplus) When the price of...

Question 6

Which of the following is NOT an important provision of GATT?

Accepted Answer

GATT did not have a provision about the approval of export subsidies.

Question 7

A free-trade area is defined as:

Accepted Answer

A free-trade area is a trading agreement among a group of countries in which they agree to remove trade barriers between themselves, such as tariffs or quotas. This allows for greater free flow of goods and services between member countries. However, each member country is free to maintain its own trade policies with non-member countries.

Question 8

When consumers are able to buy a product at a price lower than its marginal value to them, it is called:

Accepted Answer

Consumer surplus is the difference between the price a consumer is willing to pay for a product or service and the actual price they pay. When a consumer pays less than what the product or service is worth to them, they receive a surplus of value.

Question 9

GATT maintained a provision that nations could enact temporary emergency tariffs or quotas if imports threatened the existence of domestic producers. The WTO has maintained that provision. Economists call this:

Accepted Answer

The provision that allows nations to enact temporary emergency tariffs or quotas if imports threaten the existence of domestic producers is commonly known as the escape clause. This provision has been maintained by both GATT and the WTO.

Question 10

A customs union is different from a free-trade area, in that:

Accepted Answer

A customs union adopts identical tariffs with the rest of the world, while a free-trade area removes trade barriers between member countries but each member can have different tariffs with non-member countries. A customs union also typically involves some level of coordination on trade policies and regulations among member countries to create a more unified trade bloc.

Question 11

Producer surplus is:

Accepted Answer

Producer surplus is the difference between the market price of a good and the marginal cost of production. This means that it is the amount of profit that producers are able to make above and beyond their costs of production. Option A describes this concept accurately. Option B describes consumer surplus, which is the difference between the price that consumers are willing to pay for a good and the actual market price. Options C and D are unrelated to the concept of producer surplus.

Question 12

Normally the WTO does not allow discriminatory treatment in trade of member nations, but it makes an exception for nations:

Accepted Answer

The WTO allows member nations to engage in regional free-trade agreements as an exception to the non-discriminatory trade rules. This is because free trade agreements between groups of countries can help to promote economic integration and development within those regions. The other options are not valid exceptions to the non-discriminatory trade rules of the WTO.

Question 13

The safeguard provision or escape clause allows a country to:

Accepted Answer

The safeguard provision or escape clause allows a country to temporarily increase tariffs on certain imported goods when the domestic industry is being harmed by imports. This allows the domestic industry to have some protection against cheaper imports and gives them time to adjust and become more competitive. Option A is incorrect because importing products below cost is known as dumping and is usually subject to anti-dumping duties. Option B is incorrect because exporting products by selling below cost is not a desirable practice and can harm domestic industries in the foreign country. Option C is also incorrect because avoiding tariffs in foreign countries is not the purpose of the safeguard provision or escape clause.

Question 14

(Figure: Consumer Surplus) By how much will consumer surplus increase if the price of the product decreases to $10?

Accepted Answer

Consumer surplus is the area above the price line and below the demand curve. At the original price of $15, consumer surplus is the area of the triangle formed by the demand curve, the vertical axis, and the price line, which is (1/2)*(6)*(15-10) = $30. If the price decreases to $10, the new consumer surplus is the area of the triangle formed by the demand curve, the vertical axis, and the new price line, which is (1/2)*(9)*(10-5) = $22.50. Therefore, consumer surplus increases by $22.50 - $30 = -$7.50, but since consumer surplus cannot be negative, the actual increase is $0 - (-$7.50) = $7.50, which is closest to option C: $185.

Question 15

A country that becomes a member of the World Trade Organization agrees to bind its tariffs. "Binding" means that the country agrees not to increase existing tariffs and that it will not introduce new tariffs. However, GATT allows three exceptions to binding. Which of the following is NOT an exception to binding?

Accepted Answer

Tariff reductions negotiated in free-trade areas are not an exception to binding. When a country negotiates tariff reductions in a free-trade area, it is still bound not to increase existing tariffs or introduce new ones.

Question 16

To help its domestic producers, the United States unilaterally raised tariffs on _____ in early 2002, but after a ruling against the United States by the WTO, it was forced to rescind the tariff.

Accepted Answer

In early 2002, the United States unilaterally raised tariffs on steel to protect its domestic producers. However, the World Trade Organization ruled against the United States and it was forced to rescind the tariff. There were no unilateral tariffs on autos, oil, or dairy products in 2002.

Question 17

Suppose that the supply curve for widgets is described by this equation: P = 1/2Q. What is the value of producer surplus when P = 5?

Accepted Answer

The answer of Suppose that the supply curve for widgets...

Question 18

Suppose that consumer demand is given by this equation: P = 10 - Q. What is the value of consumer surplus when P = 5?

Accepted Answer

To find consumer surplus, we need to first determine the equilibrium quantity, which we can do by setting P = 10 - Q equal to the price level of $5:
5 = 10 - Q
Q = 5
Next, we can plug the equilibrium quantity into the demand equation to find the equilibrium price:
P = 10 - 5 = 5
So the equilibrium quantity is 5 and the equilibrium price is $5. To find consumer surplus, we need to find the area above the equilibrium price and below the demand curve. This is a triangle with a base of 5 (the equilibrium quantity) and a height of $5 (the distance between the equilibrium price and the maximum price a consumer is willing to pay of $10):
(1/2)(5)(5) = $12.50
Therefore, the value of consumer surplus when P = 5 is $12.50.

Question 19

When firms are able to sell units of a good at a price higher than the marginal cost of production, they are getting:

Accepted Answer

When firms are able to sell units of a good at a price higher than the marginal cost of production, they are getting producer surplus. Producer surplus is the difference between the price a firm receives and the cost of producing the good.

Question 20

GATT/WTO allows nations to impose tariffs in response to unfair trade practices such as:

Accepted Answer

The answer of GATT/WTO allows nations to impose tariffs in...

Quiz 8: Import Tariffs and Quotas Under Perfect Competition