Using the supply and demand equations below, calculate the impact of a proposed $20.00 tariff. (3 points each)
Qd = 21,000 – 50P
Qs = 1,000 + 30P
Current Price with international trade is $220 per unit
Now suppose that the current $220 price includes a 10% ad valorem tariff that will disappear with a new trade agreement. After the tariff is removed, solve for the following values.
a) What will be the loss in government revenue?
b) What will be the increase in consumer surplus?
c) What will be the increase in overall wealth for the country?
: We have seen that a quota will exactly mimic the effects of a tariff. So why would a country seek to enforce a quota instead of a tariff? Is it more or less costly than a tariff for the country imposing it? (3 points)
2: What is a voluntary export restraint, and why would a country seek to have an importing country agree to one? Is it more or less costly to enforce in comparison to a tariff or quota? (3 points)
3: What are local content and mixing standards? How do they make a country worse off? (3 points)
5: The following supply and demand curves are used to estimate sales and manufacturing of microwaves in the U.S. Currently, the use of child labor in factories overseas has driven the price below the domestic equilibrium, and has led U.S. manufacturers to demand protection. Use this information to answer the following questions. (3 points each)
Qd = 65,000 – 120P
Qs = -1,000 + 210P
Current Price with international trade is $150 per unit
a) At the international equilibrium price of $150, how many units are currently being imported into the U.S.?
b) Suppose that the U.S. government decided that no more than 8,000 microwaves should be imported? Given that quota, what will be the new price of microwaves in the U.S.?
c) What is the deadweight loss from the production and consumption effects of this quota?
d) What is the loss in consumer surplus from this quota?
e) What is the gain in producer surplus from this quota?
f) Unlike with a tariff, why is it impossible to calculate precisely the overall cost of this quota to the United States?
Chapter 10:
1: A single firm’s innovations in production technology often benefit the production of other firms, because these other firms learn about the new technology and can use some of the ideas in their own production. Based on this information, answer the following questions. (2 points each)
a) Why does this positive externality create an incentive to protect this firm from competing imports?
b) What type of remedy would be most efficient in protecting this firm from competing imports? Explain why it would be preferable to other methods
2: A small price-taking nation imports a good that it could not possibly produce itself at a finite price. Can you describe a plausible condition under which that nation would benefit from an import tariff on these goods? (3 points)
3: What is the infant industry argument for putting up barriers to imports? What are its merits and its weaknesses? (3 points)
4: We have shown in class that imposing barriers to imports costs the country more than it gains, yet countries still commonly impose import barriers. Why are manufactures able to convince regulators to impose these barriers when they make the country less wealthy? (3 points)
5: Assume that a sock-importing country is determined to expand domestic production of socks. From the point of view of the countries currently exporting socks into that country, which method would be most favorable out of a VER, a production subsidy, or a tariff on imported socks? Rank the three in order of preference, and explain why. (3 points)
Chapter 11:
1: What are the two possible definitions of dumping, and which is commonly used to determine dumping today? (3 points)
2: What is persistent dumping, and what two conditions must exist for it to occur? (3 points)
3: What is predatory dumping, and why is it unlikely that it actually occurs? (3 points)
4: In the country of Utopia, the following demand and supply curves apply to the sale and manufacturing of Ben and Jerry’s Chunky Monkey ice cream. Use this information to answer the questions below. (3 points each)
Qd = 38,000 – 10,000P
Qs = 2,000 + 2,000P
Current Price with international trade is $3.20 per unit
a) How many units of this delicious good are currently being exported to other countries?
b) In order to benefit dairy farmers, the government creates an export subsidy of $0.30 per unit exported. What will be the cost of the subsidy for the government?
c) What will be the increase in producer surplus?
d) What will be the net cost of the subsidy to the citizens of Utopia?
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