Question

1.

Domestic supply $3 World supply with tariff World supply $2 Domestic demand 60 100 150 200 240 Q (in millions)

Reference: Ref 19-4 (9-4)

(Figure: Foreign Trade with a Tariff) Refer to the figure. A $1 tariff results in:

a. an increase in imports of 80 million units.

b. a decrease in imports of 80 million units.

c. an increase in imports of 100 million units.

d. a decrease in imports of 100 million units.

2. In 1845, French economist Frédéric Bastiat famously compared tariffs to blocking out the sun since both low-priced imports and free sunlight discourage domestic industry. What part of the trade diagram best describes the encouragement of domestic industry if Bastiat's “blockade” was taken seriously?

a. deadweight loss

b. fall in consumer surplus

c. fall in producer surplus

d. wasted resources

3.Figure: Foreign Trade 2

Reference: Ref 19-9 (9-9)
(Figure: Foreign Trade 2) Refer to the figure. What is the dollar value of wasted resources as a result of prohibiting trade in this market?Group of answer choices

a. $30,000

b. $5,000

c. $2,500

d. $22,500

Answer 1

1) b. a decrease in imports of 80 million units. Before tariff imports are (240 - 60) = 180 and after tariff imports are (200 - 100) = 100. Hence imports are reduced to 80 million

2) c. $2,500. Without trade, domestic quantity is 1000 units but after trade domestic quantity is 800 units. This results in a trade gain of 0.5*(50 - 25)*(1000 - 800) = $2500. These gains are lost when trade is not allowed.