International Trade and Public Policy: Practice Questions (Microeconomics 2.9)

Answer: (B). At $4, Qd = 200 − 80 = 120 and Qs = 80 − 40 = 40. Imports fill the gap: 120 − 40 = 80 thousand towels.

• (A) is domestic quantity supplied. That is what Quellmoor makes itself, not what it buys abroad.
• (C) is domestic quantity demanded. Part of it is met by Quellmoor’s own producers, so it overstates imports.
• (D) adds Qd and Qs. Imports are the difference, not the sum.

Answer: (C). The world price is higher, so the domestic price rises to it and the country exports. Buyers pay more and buy less, so consumer surplus falls. Sellers get more and sell more, so producer surplus rises. Producers gain more than consumers lose, so total surplus rises.

• (A) describes an importing country, where the world price is below the autarky price.
• (B) gets the winners and losers right but assumes the consumers’ loss outweighs the producers’ gain. The gain triangle means total surplus rises.
• (D) forgets that consumers pay a higher price. Trade does not make every group better off.

Answer: (C). The domestic price rises to Pw + t. Domestic producers move up their supply curve and make more; buyers move up their demand curve and buy less, so imports fall. The two deadweight-loss triangles mean total surplus falls.

• (A) mixes up the world price and the domestic price. A small country cannot change the world price, and imports fall, not rise.
• (B) treats the tariff as a cost to domestic producers. It is charged only on imports, so the domestic supply curve stays put and domestic output rises along it.
• (D) assumes foreign sellers bear the tariff. In this model the domestic price rises by the full tariff, so consumer surplus falls.

(a) 200 − 20P = 20P − 40, so 40P = 240, P = $6 and Q = 200 − 120 = 80 thousand towels.

Demand meets the price axis at $10 (Qd = 0). Supply meets it at $2 (Qs = 0).

(b) CS = ½ × 80 × (10 − 6) = 160. PS = ½ × 80 × (6 − 2) = 160. Total = 320 ($ thousand).

(c) At $4, Qd = 120 and Qs = 40. CS = ½ × 120 × (10 − 4) = 360. PS = ½ × 40 × (4 − 2) = 40. Total = 400.

(d) Consumers gain 360 − 160 = 200; producers lose 160 − 40 = 120. Total surplus rises by 80. Check: the gain triangle has base 80 (imports) and height 6 − 4 = 2, so ½ × 80 × 2 = 80.

Suggested mark points (4): 1 for $6 and 80; 1 for autarky CS and PS; 1 for free-trade CS and PS; 1 for consumers gain, producers lose, net +80.

Common error: using $0 instead of $2 as the bottom of the producer surplus triangle. Supply starts at $2 here.

(a) Vertical axis “Price ($ per towel)”; horizontal axis “Towels (thousands per month)”. Downward-sloping domestic demand D and upward-sloping domestic supply S crossing at $6 and 80. A horizontal line at Pw = $4 and a second, higher line at Pw + t = $5. At $4 mark Qs = 40 and Qd = 120; at $5 mark Qs = 60 and Qd = 100. Imports with the tariff = 100 − 60 = 40, shown as the gap at $5. Shade the rectangle between $4 and $5 from 60 to 100 as revenue, and the two triangles beside it (from 40 to 60 and from 100 to 120, between $4 and $5) as deadweight loss.

(b) Revenue = 1 × 40 = $40 thousand. DWL = ½ × 1 × (60 − 40) + ½ × 1 × (120 − 100) = 10 + 10 = $20 thousand.

(c) CS at $5 = ½ × 100 × (10 − 5) = 250, down from 360: change −110. PS at $5 = ½ × 60 × (5 − 2) = 90, up from 40: change +50. Check: 110 = 50 + 40 + 20.

(d) Imports stop when the domestic price reaches the autarky price of $6. Smallest prohibitive tariff = 6 − 4 = $2.

Do not award the first point if the domestic supply curve is shifted instead of drawing a new price line.

(a) At $4, buyers want 80 thousand more towels than domestic firms supply, but only 60 thousand may be imported. The shortage pushes the price up until Qd − Qs = 60. (200 − 20P) − (20P − 40) = 60 gives 40P = 180, so P = $4.50. Check: Qd = 110, Qs = 50, gap = 60.

(b) Domestic production rises from 40 to 50 thousand towels. The higher price makes domestic producers move up their supply curve.

(c) Buyers pay more ($4.50 rather than $4) and buy less (110 rather than 120), so consumer surplus falls (by 57.5 if calculated). Total surplus falls: towels are now made at home at a cost above the world price, and some buyers who valued towels above $4 no longer buy them. These are deadweight losses.

(d) The tariff earns the government 0.50 × 60 = $30 thousand a month; the quota earns the government nothing. (Under the quota, that gap between the domestic and world price on imported towels goes to whoever holds the right to import.)

(e) No. Free-trade imports are only 80 thousand. A limit of 90 thousand does not bind, so the price stays at $4.

(a) 90 − 10P = 10P − 10, so P = $5 and Q = 40. The world price of $7 is above $5, so domestic sellers can earn more abroad: Quellmoor exports.

(b) At $7: Qd = 90 − 70 = 20; Qs = 70 − 10 = 60. Exports = 60 − 20 = 40 thousand boxes.

(c) Demand meets the price axis at $9; supply at $1.

• CS: ½ × 40 × (9 − 5) = 80 → ½ × 20 × (9 − 7) = 20: change −60.
• PS: ½ × 40 × (5 − 1) = 80 → ½ × 60 × (7 − 1) = 180: change +100.
• Total surplus: 160 → 200: change +40 ($ thousand). Check: ½ × 40 × (7 − 5) = 40.

(d) The claim is partly right. Families do pay more and their surplus falls by 60. But apple growers gain 100, and 60 of that is simply surplus moved from buyers to sellers inside Quellmoor. The extra 40 is a real gain: Quellmoor now sells abroad, at $7 a box, apples that cost its growers less than $7 to produce, and the boxes its own families stop buying were valued by them at less than $7. So the country as a whole is better off; the trade creates winners and losers rather than harming the country. A fair conclusion names both groups and the net gain.