Figure 4.1 illustrates the demand and supply schedules for pocket calculators in Mexico, a "small" nation that is unable to affect the world price.
Figure 4.1. Import Tariff Levied by a "Small" Country
-Consider Figure 4.1.In the absence of trade, Mexico produces and consumes
A) 10 calculators.
B) 40 calculators.
C) 60 calculators.
D) 80 calculators.

Question

Figure 4.1 illustrates the demand and supply schedules for pocket calculators in Mexico, a "small" nation that is unable to affect the world price.
Figure 4.1. Import Tariff Levied by a "Small" Country 
-Consider Figure 4.1.In the absence of trade, Mexico produces and consumes
A) 10 calculators. 
B) 40 calculators. 
C) 60 calculators. 
D) 80 calculators.

Quizplus · Accepted Answer

In the absence of trade, Mexico produces and consumes at point A, where the domestic price is equal to the opportunity cost of producing calculators (the slope of the production possibility frontier). At this point, Mexico produces 60 calculators. With the introduction of an import tariff, the domestic price will rise to P1, reducing imports to zero and increasing domestic production to 80 calculators (point B). However, there will be a deadweight loss represented by the shaded triangle which represents the loss of consumer surplus and the inefficiency caused by the tariff. Therefore, the best choice is for Mexico to consume and produce 60 calculators without importing or levying an import tariff.

Figure 41 Illustrates the Demand and Supply Schedules for Pocket Calculators