Question 1

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

When a tariff is imposed on imported wine, the price of imported wine will increase, making it less attractive to consumers. This will increase the demand for domestically produced wine, leading to an increase in domestic production. As a result, the domestic price of wine will also increase due to increased demand and a reduction in supply of imported wine. The decrease in quantity of imported wine will also lead to a reduction in the amount of revenue that could have been generated from imports.

Question 2

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, which reduces the quantity demanded and leads to a reduction in overall welfare known as deadweight loss. This occurs because the move towards equilibrium without trade reduces the gains from trade, as consumers must now pay a higher price for the imported good, and producers face a smaller market for their product.

Question 3

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

Allowing free trade and importing cars means that domestic consumers have access to a wider variety of cars at lower prices, which benefits them. However, domestic car producers may face more competition and potentially lose market share, which can harm them. The overall effect on gains and losses for domestic producers and consumers will depend on the specific circumstances and context of the country and its car industry. Therefore, it is not necessarily true that the gains to domestic producers outweigh the losses to domestic 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 country imposes a tariff on imported shoes, it makes them more expensive for buyers in that country. As a result, buyers become worse off because they have to pay more for the same product. On the other hand, domestic sellers of shoes benefit from the tariff because it makes imported shoes more expensive, which means that their products become more competitive in the market. Therefore, they become better off due to the increase in demand for their product.

Question 5

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 6

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 calculation of deadweight loss requires adding the decrease in consumer surplus and the decrease in producer surplus, not including any increase in government revenue. Therefore, the deadweight loss would be $400 million ($500 million consumer surplus reduction plus $100 million producer surplus increase).

Question 7

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

Accepted Answer

Both import quotas and tariffs increase the cost of imports, which discourages their consumption and causes the quantity of imports to decrease.

Question 8

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 9

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 be higher than the world price, to account for the additional cost of the tariff.

Question 10

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

Accepted Answer

A tariff reduces the quantity of imports and creates a gap between the domestic price and the world price, which leads to a deadweight loss. This gap is smaller when the market is closer to its equilibrium level without trade, thus a tariff moves the market closer to the equilibrium.

Question 11

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

Accepted Answer

Import quotas and tariffs restrict the amount of imported goods in the domestic market, which raises the prices of these products. This creates an advantage for domestic sellers, who can now sell their products at a higher price than their foreign competitors. However, domestic buyers are worse off because they have to pay a higher price for the goods they want to buy.

Question 12

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

Accepted Answer

Free trade allows firms to access new markets, increase competition, and benefit from comparative advantages, which in turn can lead to lower costs of production and increased efficiency.

Question 13

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

Accepted Answer

Deadweight loss is the loss in economic efficiency that occurs when the equilibrium for a good or service is not achieved. Tariffs and quotas distort the market equilibrium, resulting in a decrease in overall welfare or total surplus.

Question 14

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

When a country becomes an importer of steel, it usually means that they are able to purchase steel from other countries at a lower cost than producing it domestically. This increased competition can lead to a decrease in the domestic price of steel, not an increase.

Question 15

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 16

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 typically leads to an increase in total surplus due to access to a larger market and the ability to benefit from comparative advantages. Therefore, the statement is true.

Question 17

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 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 total welfare loss from the tariff is the sum of the reduction in consumer surplus and the deadweight loss, which is $150 million + $30 million = $180 million. Since the tariff generates $50 million in producer surplus and $180 million in welfare loss, the net effect is a decrease in total surplus of $130 million ($50 million - $180 million = -$130 million). Therefore, the government does not generate revenue, but instead there is a net welfare loss to society.

Question 19

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 that it imports, the price of shoes in that country increases, making buyers worse off as they have to pay more for the same pair of shoes. This leads to a decrease in consumer surplus for the buyers.

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

A tariff is a tax on imported goods, which means that it will increase the cost of the imported watches. Domestic watch manufacturers may also raise their prices, as consumers will have fewer options and may be willing to pay more. Therefore, both domestic and imported watches will experience a price increase equal to the amount of the tariff.

Quiz 9: Application: International Trade