Suppose that a foreign monopolist supplies the entire domestic market (there is no domestic production). The home country then applies a $10 tariff on imports from the foreign monopolist. The home country will be better off if:

Question

Quizplus · Accepted Answer

In this scenario, since the foreign monopolist supplies the entire domestic market, it is likely that they have market power and can charge a higher price than they would in a competitive market. By placing a tariff on imports, the home country can reduce the market power of the foreign monopolist and potentially decrease the price of imports for domestic consumers. However, a tariff creates a deadweight loss due to the distortion of trade and reduced efficiency in the market. The home country will benefit if the gain from improved terms-of-trade (lower prices for imports) exceeds the deadweight loss from the tariff. Therefore, the best choice is D.

Suppose That a Foreign Monopolist Supplies the Entire Domestic Market