Question 1

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 increase in producer surplus and tariff revenue ( $100 million + $200 million = $300 million) is less than the reduction in consumer surplus ($500 million), indicating a net welfare loss. Therefore, the deadweight loss of the tariff cannot be less than the net welfare loss and is likely to be greater than $300 million. The information provided does not allow us to calculate the exact deadweight loss.

Question 2

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 3

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, which reduces the quantity of imports. Import quotas directly limit the quantity that can be imported, while tariffs increase the price of imported goods, making them less attractive to consumers.

Question 4

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 tariff is imposed on shoes, the cost of importing shoes increases, making it more expensive for buyers in that country. This reduces the quantity of shoes demanded and therefore reduces the welfare of the buyers. On the other hand, domestic shoe producers benefit from the tariff as they now face less competition from imported shoes, which increases their profits.

Question 5

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 taxes on imported goods, so they make it more expensive for consumers to buy those goods. This generally leads to a decrease in the quantity of imported goods purchased and an increase in the quantity of domestically produced goods. In the case of wine, a tariff on imported wine would raise the price of imported wine, making it less attractive to buyers, and encourage consumers to purchase more domestically produced wine. The increased demand for domestic wine would likely result in an increase in the quantity of wine produced domestically.

Question 6

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 decreases the quantity demanded and increases the quantity supplied of imports. This leads to a decrease in the quantity of imports and a movement closer to the equilibrium without 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 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 8

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 allows Spritzland to benefit from comparative advantage and access a larger market for their wristwatches. This increases consumer surplus as consumers have access to more options at potentially lower prices, and also increases producer surplus as Spritzland producers can sell more watches and potentially charge higher prices. Overall, the total surplus in the market for wristwatches in Spritzland will likely increase with the legalization of international trade.

Question 9

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 10

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 through free-trade policies, it means that they are able to import steel from other countries at a lower cost. This increase in competition drives down the price of steel domestically, rather than increasing it.

Question 11

The small-economy assumption is necessary to analyze the gains and losses from international trade.

Accepted Answer

The small-economy assumption simplifies analysis by assuming the economy cannot influence world prices, but it is not necessary to analyze gains and losses from international trade. Larger economies can also be analyzed for their trade effects, though the analysis may be more complex.

Question 12

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

A tariff is a tax on imported goods. When a tariff is placed on watches, the cost of importing watches to the domestic market increases. To stay competitive, domestic watch makers will also increase their prices by the same amount as the tariff, leading to an increase in the price of both domestic and imported watches.

Question 13

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

Accepted Answer

This is correct. Deadweight loss is the loss of total welfare or economic efficiency that occurs when the equilibrium for a good is not achieved. A tariff or quota can disrupt this equilibrium and result in a decrease in total surplus, leading to deadweight loss.

Question 14

The greater the elasticities of supply and demand, the smaller are the gains from trade.

Accepted Answer

Greater elasticities of supply and demand typically lead to larger gains from trade because they allow for more substantial adjustments in quantities traded in response to price changes, enhancing the efficiency and benefits of trade.

Question 15

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 imported goods, reducing the quantity demanded and supplied, and reducing the gains from trade. This creates a deadweight loss, which is the loss of economic efficiency that occurs when the benefits of trade are not maximized.

Question 16

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

Accepted Answer

Import quotas and tariffs limit competition from foreign producers, thereby increasing prices for domestic buyers and allowing domestic sellers to charge higher prices and increase profits.

Question 17

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 those shoes increases for buyers in the importing country. This leads to higher prices for consumers and a decreased quantity demanded, resulting in a decrease in overall welfare for buyers in that country.

Question 18

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 19

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

Importing cars may lead to lower prices for consumers, but it could also reduce the competitiveness of domestic car producers and lead to job loss. The gains and losses depend on various factors such as the size of the domestic car industry, the level of competition, and the quality of the imported cars. Therefore, it is not necessarily the case that the gains to domestic producers outweigh the losses to domestic consumers.

Question 20

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 above the world price, as the tariff raises the cost of importing the product, making it more expensive for domestic consumers. This creates a price differential between the domestic and world prices.

Quiz 9: Application: International Trade