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CHAPTER 5NONTARIFF TRADE BARRIERS

MULTIPLE CHOICE
1. The imposition of a tariff on imported steel for the home country results in:
a
.
Improving terms of trade and rising volume of trade
b
.
Higher steel prices and falling steel consumption
c
.
Lower profits for domestic steel companies
d
.
Higher unemployment for domestic steel workers
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$. %hich of the following refers to a market&sharing pact negotiated by trading partners to moderate the
intensity of international competition'
a
.
(rderly marketing agreement
b
.
Local content re)uirements
c
.
Import )uota
d
.
Trigger price mechanism
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*. !uppose the +nited !tates and ,apan enter into a voluntary e-port agreement in which ,apan imposes
an e-port )uota on its automakers. The largest share of the e-port )uota.s /revenue effect/ would tend
to be captured by:
a
.
The +.!. government
b
.
,apanese automakers
c
.
American auto consumers
d
.
American autoworkers
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0. !uppose the government grants a subsidy to domestic producers of an import&competing good. The
subsidy tends to result in deadweight losses for the domestic economy in the form of the:
a
.
1onsumption effect
b
.
2edistribution effect
c
.
2evenue effect
d
.
#rotective effect
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4. Tariffs and )uotas on imports tend to involve larger sacrifices in national welfare than would occur
under domestic subsidies. This is because5 unlike domestic subsidies5 import tariffs and )uotas:
a
.
#ermit less efficient home production
b
.
3istort choices for domestic consumers
c
.
2esult in higher ta- rates for domestic residents
d
.
2edistribute revenue from domestic producers to consumers
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6. !uppose the government grants a subsidy to its e-port firms that permits them to charge lower prices
on goods sold abroad. The e-port revenue of these firms would rise if the foreign demand is:
a
.
7lastic in response to the price reduction
b
.
Inelastic in response to the price reduction
c
.
+nit elastic in response to the price reduction
d
.
one of the above
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8. "ecause e-port subsidies tend to result in domestic e-porters charging lower prices on their goods sold
overseas5 the home country.s:
a
.
7-port revenues will decrease
b
.
7-port revenues will rise
c
.
Terms of trade will worsen
d
.
Terms of trade will improve
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9. %hich trade restriction stipulates the percentage of a product.s total value that must be produced
domestically in order for that product to be sold domestically'
a
.
Import )uota
b
.
(rderly marketing agreement
c
.
Local content re)uirement
d
.
:overnment procurement policy
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;. The imposition of a domestic content re)uirement by the +nited !tates would cause consumer surplus
for Americans to:
a
.
2ise
b
.
<all
c
.
2emain unchanged
d
.
one of the above
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1=. 3omestic content legislation applied to autos would tend to:
a
.
!upport wage levels of American autoworkers
b
.
Lower auto prices for American autoworkers
c
.
7ncourage American automakers to locate production overseas
d
.
Increase profits of American auto companies
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11. 1ompared to an import )uota5 an e)uivalent tariff may provide a less certain amount of protection for
home producers since:
a
.
A tariff has no deadweight loss in terms of production and consumption
b
.
<oreign firms may absorb the tariff by offering e-ports at lower prices
c
.
Tariffs are effective only if home demand is perfectly elastic
d
.
>uotas do not result in increases in the price of the imported good
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1$. 7mpirical studies show that because voluntary e-port )uotas are typically administered by e-porting
countries5 foreign e-porters tend to:
a
.
2aise their e-port prices5 thus capturing much of the )uota.s revenue effect
b
.
Lower their e-port prices5 thus losing much of the )uota.s revenue effect
c
.
2aise their e-port prices5 thus selling more goods overseas
d
.
Lower their e-port prices5 thus selling fewer goods overseas
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1*. 1oncerning the restrictive impact of an import )uota5 assume there occurs an increase in the domestic
demand for the import product. As long as the )uota falls short of what would be imported under free
market conditions5 the economy.s ad?ustment to the increase in demand would take the form of:
a
.
A decrease in domestic production of the import good
b
.
An increase in the amount of the good being imported
c
.
An increase in the domestic price of the import good
d
.
A decrease in domestic consumption of the import good
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10. Assume the +.!. has a competitive advantage in producing calculators5 while the rest of the world has
a competitive advantage in steel. !uppose the +.!. and the rest of the world enter into an agreement to
lower import )uotas below e-isting levels on calculators and steel. %hich of the following would least
likely occur for the +.!.' 2ising levels of:
a
.
1onsumer surplus for American buyers of steel
b
.
#roducer surplus for American steelmakers
c
.
#roduction in the American calculator industry
d
.
#roducer surplus for American calculator producers
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14. A firm that faces problems of falling sales and e-cess productive capacity might resort to international
dumping if it:
a
.
1an charge higher prices in markets that are elastic to price changes
b
.
7arns revenues on foreign sales that at least cover variable costs
c 1an sell at that price where domestic and foreign demand elasticities e)uate
.
d
.
Is able to force foreign prices below marginal production costs
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16. A producer successfully practicing international dumping would charge:
a
.
A relatively higher price in the more inelastic market
b
.
A relatively higher price in the more elastic market
c
.
The same price in all markets5 regardless of their elasticities
d
.
3ifferent prices in all markets5 regardless of their elasticities
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18. The practice of 1anadian firms dumping their products in !weden poses a problem for economic
policymakers since dumping tends to:
a
.
<avor !wedish consumers over 1anadian consumers
b
.
<avor !wedish producers over 1anadian producers
c
.
"ecome widespread as firms operate at full productive capacity
d
.
2esult in firms charging prices above the total costs of production
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19. The +nited Auto %orkers union attempted to win the approval of legislation that would moderate the
practice of foreign sourcing on the part of American auto manufacturers. %hich of the following best
represents this legislation'
a
.
@oluntary e-port )uotas
b
.
Trigger price mechanism
c
.
Tariff )uotas
d
.
Local content laws
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1;. A main factor behind the president.s decision to e-tend relief to steel firms in the form of trigger prices
was that:
a 3umping complaints can be time consuming and e-pensive to implement
.
b
.
The Tokyo 2ound outlawed the granting of subsidies to steel firms
c
.
Trigger prices involve Aero deadweight welfare loss for the economy
d
.
(rderly marketing agreements were too costly to administer
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$=. If a tariff and an import )uota lead to e)uivalent increases in the domestic price of steel5 then:
a
.
The )uota results in efficiency reductions but the tariff does not
b
.
The tariff results in efficiency reductions but the )uota does not
c
.
They have different impacts on how much is produced and consumed
d
.
They have different impacts on how income is distributed
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$1. If a tariff and an import )uota lead to e)uivalent increases in the domestic price of steel5 then:
a
.
The )uota results in efficiency reductions but the tariff does not
b
.
The tariff results in efficiency reductions but the )uota does not
c
.
They have identical impacts on how much is produced and consumed
d
.
They have identical impacts on how income is distributed
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$$. <rom the perspective of the American public as a whole5 e-port subsidies levied by overseas
governments on goods sold to the +nited !tates:
a
.
Help more than they hurt
b
.
Hurt more than they help
c
.
Are e)uivalent to an import )uota
d
.
Are e)uivalent to an e-port )uota
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$*. 7-port subsidies levied by foreign governments on products in which the +nited !tates has a
comparative disadvantage:
a
.
Lower the welfare of all Americans
b
.
Lead to increases in +.!. consumer surplus
c
.
7ncourage +.!. production of competing goods
d
.
7ncourage +.!. workers to demand higher wages
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$0. If import licenses are auctioned off to domestic importers in a competitive market5 their scarcity value
Brevenue effectC accrues to:
a
.
<oreign corporations
b
.
<oreign workers
c
.
3omestic corporations
d
.
The domestic government
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$4. A specification of a ma-imum amount of a foreign produced good that will be allowed to enter the
country over a given time period is referred to as:
a
.
A domestic subsidy
b
.
An e-port subsidy
c
.
An import )uota
d
.
An e-port )uota
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$6. Import )uotas tend to lead to all of the following e-cept:
a
.
3omestic producers of the imported good being harmed
b
.
3omestic consumers of the imported good being harmed
c
.
#rices increasing in the importing country
d
.
#rices falling in the e-porting country
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$8. To maintain that !outh Doreans are dumping their @12s in the +nited !tates is to maintain that:
a
.
Doreans are selling @12s in the +nited !tates below their production cost
b
.
Doreans are selling @12s in the +nited !tates above their production cost
c
.
The cost of manufacturing @12s in Dorea is lower in Dorea than in the +nited !tates
since wages are lower in Dorea
d
.
The cost of manufacturing @12s in Dorea is higher in Dorea than in the +nited !tates
since wages are higher in Dorea
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$9. If the home country.s government grants a subsidy on a domestically produced good5 domestic
producers tend to:
a
.
1apture the entire subsidy in the form of higher profits
b
.
Increase their level of production
c
.
2educe wages paid to domestic workers
d
.
1onsider the subsidy as an increase in production cost
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$;. <or years the +.!. government levied )uotas on ine-pensive oil imported from the Eiddle 7ast. The
)uotas led to cost increases for +.!. consumers totaling F* billion for oil products. An apparent
?ustification for this policy was that:
a
.
+.!. oil companies and workers deserved higher incomes
b
.
+.!. oil was of superior )uality and merited higher prices
c
.
(ne should not be too dependent on foreign suppliers of crucial resources
d
.
The +.!. government needed the )uota revenue to balance its budget
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*=. In certain industries5 ,apanese employers do not lay off workers. Therefore5 they sometimes have
e-cess supplies of goods that they cannot sell on the home market without lowering prices. To hold
down losses5 they sell goods in overseas markets at prices well beneath those in ,apan. This practice is
best referred to as:
a
.
(rderly marketing
b
.
Trigger pricing
c 3omestic content pricing
.
d
.
3umping
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Figure 5.1 illustrates the steel market for Mexico, assumed to be a "small" country that is unable to
affect the world price. Suppose the world price of steel is gien and constant at !"## per ton. $ow
suppose the Mexican steel industry is able to obtain trade protection.
Figure 5.1. Alternatie N!ntari"" Tra#e Barrier$ Leie# %& a 'S(all' C!untr&
(With quota or subsidy)
(No quota or subsidy)
*1. 1onsider <igure 4.1. %ith free trade5 the )uantity of steel imported by Ee-ico e)uals:
a
.
$ tons
b
.
0 tons
c
.
6 tons
d
.
9 tons
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*$. 1onsider <igure 4.1. %ith free trade5 Ee-ico.s consumer surplus and producer surplus respectively
e)ual:
a
.
F$=== and F1$==
b
.
F*$== and F$==
c
.
F*6== and F9==
d
.
F0=== and F6==
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**. 2eferring to <igure 4.15 suppose the Ee-ican government imposes an import )uota e)ual to $ tons of
steel.
If Ee-ican steel importers behave as monopoly buyers and foreign e-porters behave as competitive
sellers5 the overall welfare loss of the )uota to Ee-ico e)uals:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
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*0. 2eferring to <igure 4.15 suppose the Ee-ican government imposes an import )uota e)ual to $ tons of
steel.
If foreign e-porters behave as monopoly sellers5 and Ee-ican importers behave as competitive buyers5
the overall welfare loss of the )uota to Ee-ico e)uals:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
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*4. 2eferring to <igure 4.15 suppose the Ee-ican government imposes an import )uota e)ual to $ tons of
steel.
If the Ee-ican government auctions import licenses to the highest foreign bidder5 the overall welfare
loss of the )uota to Ee-ico e)uals:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
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*6. 1onsider <igure 4.1. !uppose the Ee-ican government provides a subsidy of F$== per ton to its steel
producers5 as indicated by the supply schedule !E Bwith subsidyC.
The )uantity of imports e)uals:
a
.
1 ton
b
.
$ tons
c
.
* tons
d
.
0 tons
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*8. 1onsider <igure 4.1. !uppose the Ee-ican government provides a subsidy of F$== per ton to its steel
producers5 as indicated by the supply schedule !E Bwith subsidyC.
The total cost of the subsidy to the Ee-ican government e)uals:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
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*9. 1onsider <igure 4.1. !uppose the Ee-ican government provides a subsidy of F$== per ton to its steel
producers5 as indicated by the supply schedule !E Bwith subsidyC.
As a result of the subsidy Ee-ican steel producers gain GGGG of producer surplus.
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
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*;. 1onsider <igure 4.1. !uppose instead that the Ee-ican government provides a subsidy of F$== per ton
to its steel producers5 as indicated by the supply schedule !E Bwith subsidyC.
As a result of the subsidy5 the welfare loss to Ee-ico due to inefficient domestic production e)uals:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
A!: A #T!: 1
0=. 1onsider <igure 4.1. !uppose the Ee-ican government provides a subsidy of F$== per ton to its steel
producers5 as indicated by the supply schedule !E Bwith subsidyC.
The overall deadweight welfare loss to Ee-ico e)uals:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
A!: A #T!: 1
01. 1onsider <igure 4.1. !uppose the rest of the world voluntarily agrees to reduce steel shipments to
Ee-ico vis&a&vis an e-port )uota e)ual to $ tons.
Assuming Ee-ican importers behave as competitive buyers while foreign e-porters behave as
monopoly sellers5 the overall welfare loss of the )uota to Ee-ico is:
a
.
F$==
b
.
F0==
c F6==
.
d
.
F9==
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0$. 1onsider <igure 4.1. !uppose the rest of the world voluntarily agrees to reduce steel shipments to
Ee-ico vis&a&vis an e-port )uota e)ual to $ tons.
Assuming Ee-ican importers behave as monopoly buyers while foreign e-porters behave as
competitive sellers5 the overall welfare loss of the )uota to Ee-ico is:
a
.
F$==
b
.
F0==
c
.
F6==
d
.
F9==
A!: " #T!: 1
Figure 5." illustrates the reenue and cost conditions of %&' (nc. which sells calculators in 'anada
and France.
Figure 5.). Internati!nal Du(*ing
0*. 1onsider <igure 4.$. In the absence of international dumping5 A"1 Inc. ma-imiAes profits by selling
GGGG calculators at a price of FGGGGH the firm realiAes profits totaling FGGGG.
a
.
$85 F45 F40
b
.
$85 F45 F*6
c
.
$05 F05 F06
d
.
$05 F05 F$9
A!: A #T!: 1
00. 2eferring to <igure 4.$5 consider if A"1 Inc. sells $8 calculators at a price of F4 each5 realiAing profits
totaling F40. (f this )uantity5 A"1 Inc. sells GGGG calculators in 1anada and realiAes revenues totaling
FGGGGH the firm sells GGGG calculators in <rance and realiAes revenues totaling FGGGG.
a
.
145 F*45 ;5 F04
b
.
145 F045 ;5 F*4
c
.
$15 F1=45 65 F*=
d
.
$15 F*=5 65 F1=4
A!: 1 #T!: 1
04. 1onsider <igure 4.$. %ith international dumping5 A"1 Inc. sells GGGG calculators to 1anadian buyers
at a price of FGGGG and GGGG calculators to <rench buyers at a price of FGGGG.
a
.
145 F05 1$5 F8
b
.
145 F85 1$5 F0
c
.
;5 F45 145 F6
d
.
;5 F65 145 F4
A!: " #T!: 1
06. 1onsider <igure 4.$. 1ompared with the total revenue and total profit that A"1 Inc. realiAes in the
absence of dumping5 with dumping the firm attains a:
a
.
<all in revenue of F19H fall in profits of F14
b
.
<all in revenue of F195 fall in profits of F19
c
.
2ise in revenue of F195 rise in profits of F14
d
.
2ise in revenue of F195 rise in profits of F19
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Figure 5.) illustrates the apple market for Sweden, assumed to be a "small" country that is unable to
affect the world price. SSweden is the domestic supply and *Sweden is the domestic demand. SSweden+,uota is
Sweden-s supply schedule with an import .uota.
Figure 5.+. S,e#en-$ A**le Mar.et
08. 1onsider <igure 4.*. In the absence of trade5 !weden.s e)uilibrium price and )uantity of apples would
be:
a
.
F=.6= and $$ pounds
b
.
F=.6= and 10 pounds
c
.
F1.== and 19 pounds
d
.
F1.0= and 10 pounds
A!: 3 #T!: 1
09. 1onsider <igure 4.*. !uppose the rest of the world can supply apples to !weden at a price of F=.6= per
pound. %ith free trade5 !weden produces GGGG pounds of apples and imports GGGG pounds of apples.
a
.
1=5 9
b
.
1=5 19
c
.
65 $$
d
.
65 16
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0;. 1onsider <igure 4.*. At the free&trade price of F=.6= per pound5 !weden.s consumer surplus totals
FGGGG and producer surplus totals FGGGG.
a
.
F1=.9=5 F$.0=
b
.
F10.6=5 F*.;=
c
.
F$0.$=5 F1.9=
d
.
F*$.0=5 F$.*=
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4=. 1onsider <igure 4.*. If !!wedenI>uota represents the supply schedule after a )uota is levied5 !weden.s
imports will e)ual:
a
.
6 apples
b
.
9 apples
c
.
1= apples
d
.
1$ apples
A!: " #T!: 1
41. 1onsider <igure 4.*. After the )uota is levied5 the price of apples in !weden will e)ual:
a
.
F=.6= per pound
b
.
F1.== per pound
c
.
F1.0= per pound
d
.
F1.9= per pound
A!: " #T!: 1
4$. 1onsider <igure 4.*. As a result of the )uota5 !weden.s consumer surplus:
a
.
Increases by F6
b
.
Increases by F9
c
.
3ecreases by F6
d
.
3ecreases by F9
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4*. 1onsider <igure 4.*. The )uota leads to a deadweight welfare loss for !weden of an amount e)ualing:
a
.
F=.9=
b
.
F1.6=
c
.
F$.0=
d
.
F*.$=
A!: " #T!: 1
40. 1onsider <igure 4.*. The )uota.s revenue effect e)uals:
a
.
F1.6=
b
.
F$.0=
c
.
F*.$=
d
.
F0.==
A!: 1 #T!: 1
44. 1onsider <igure 4.*. Assume that !wedish import companies behave as competitive buyers while
foreign e-port companies behave as a monopoly seller. 1ompared to free trade5 !weden.s import )uota
results in domestic welfare:
a
.
:ains totaling F*.$=
b
.
:ains totaling F0.9=
c
.
Losses totaling F*.$=
d
.
Losses totaling F0.9=
A!: 3 #T!: 1
46. 1onsider <igure 4.*. Assume that !wedish import companies behave as a monopoly buyer while
foreign e-port companies behave as competitive sellers. 1ompared to free trade5 !weden.s import
)uota results in domestic welfare:
a
.
:ains totaling F1.6=
b
.
:ains totaling F*.$=
c
.
Losses totaling F1.6=
d
.
Losses totaling F*.$=
A!: 1 #T!: 1
48. 1onsider <igure 4.*. If the !wedish government auctions import licenses to the highest bidder in a
competitive market5 it could realiAe revenues of up to:
a
.
F*.$=
b
.
F0.==
c
.
F0.9=
d
.
F4.6=
A!: A #T!: 1
Figure 5./ illustrates the calculator market for 0ene1uela, assumed to be a "small" country that is
unable to affect the world price. S0ene1uela is the domestic supply schedule and *0ene1uela is the domestic
demand schedule.
Figure 5./. 0ene1uelan Cal2ulat!r Mar.et
49. 1onsider <igure 4.0. !uppose the rest of the world supplies calculators to @eneAuela at a price of F0
each. %ith free trade5 @eneAuelan imports total:
a
.
9 calculators
b
.
16 calculators
c
.
$= calculators
d
.
$0 calculators
A!: 1 #T!: 1
4;. 1onsider <igure 4.0. Assume the @eneAuelan government grants its manufacturers a production
subsidy of F0 per calculator. After the subsidy is granted5 @eneAuelan imports total:
a
.
9 calculators
b
.
1$ calculators
c
.
16 calculators
d
.
$= calculators
A!: 1 #T!: 1
6=. 1onsider <igure 4.0. The cost of the production subsidy to the @eneAuelan government totals:
a
.
F*$
b
.
F0=
c
.
F09
d
.
F40
A!: A #T!: 1
61. 1onsider <igure 4.0. The increase in @eneAuelan producer surplus under the production subsidy totals:
a
.
F16
b
.
F$=
c
.
F$0
d
.
F*$
A!: 1 #T!: 1
6$. 1onsider <igure 4.0. The production subsidy results in an overall welfare loss for @eneAuela totaling:
a
.
F9
b
.
F1$
c
.
F16
d
.
F$=
A!: A #T!: 1
6*. A voluntary e-port agreement
a
.
Typically applies only to the world.s most important e-porting nationBsC
b
.
Typically applies only to the world.s least important e-porting nation BsC
c
.
Is always more restrictive on trade than a tariff or import )uota
d
.
All of the above
A!: A #T!: 1
60. %hen voluntary e-port limits are imposed on the world.s chief e-porter
a
.
The e-ports of the non&restrained suppliers may be stimulated
b
.
A trade diversion effect may occur
c
.
"oth a and b
d
.
one of the above
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64. !ubsidies to domestic firms may lead to
a
.
An increase in prices
b
.
Higher volume of e-ports
c
.
Higher volume of imports
d
.
Increase in welfare of the trading partner
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66. 1oncerning international dumping5 many economists argue that /fair value/ should be based on
a
.
Average variable cost
b
.
Average fi-ed cost
c
.
Earginal cost
d
.
Total cost
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TRUE3FALSE
1. In the post&%orld %ar II era5 ontariff trade barriers have decreased in importance relative to tariff
barriers.
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$. An import )uota is a physical restriction on the )uantity of goods that may be imported during a
specified time period.
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*. Today most industrial countries protect their industries via global import )uotas rather than selective
import )uotas.
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0. A global import )uota permits a specified number of goods to be imported each year5 but does not
specify where the product is shipped from and who is permitted to import.
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4. Import tariffs and import )uotas yield identical protection effects5 consumption effects5 redistribution
effects5 and revenue effects.
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6. Import )uotas can yield revenue for the domestic government if it auctions import licenses to the
highest bidder in a competitive market.
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8. To the e-tent that domestic importing companies organiAe as a monopoly buyer5 and foreign e-porting
companies behave as competitive sellers5 the importing companies capture the revenue effect of a
)uota.
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9. An import )uota tends to reduce the overall welfare of the importing nation by an amount e)ual to the
protective effect5 consumption effect5 and the portion of the revenue effect that is captured by the
domestic government.
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;. The sugar import )uotas of the +.!. government have tended to increase the market price of sugar5
thus reducing the costs to the government of maintaining sugar price supports for domestic growers.
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1=. 3uring periods of growing demand5 a tariff more effectively restricts the volume of imports than an
e)uivalent import )uota.
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11. %ith a )uota placed on imported sugar5 increased domestic demand leads to increased sugar imports
but not to higher sugar prices.
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1$. %ith a tariff on auto imports5 increased domestic demand leads to a fall in the number of autos
imported and a rise in the number of autos produced domestically.
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1*. An orderly marketing agreement is a market&sharing pact negotiated by trading nations5 and its effect
is to moderate the intensity of international competition.
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10. An elimination of nontariff barriers on apples tends to increase apple imports5 reduce profits of import&
competing apple producers5 and generate ?ob losses for domestic apple workers.
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14. The distribution of an import )uota.s revenue effect depends on the relative concentration of
bargaining power between foreign e-porters and domestic importers.
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16. @oluntary e-port restraint agreements typically apply to all of the world.s e-porting nations rather than
only the most important e-porting nations.
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18. <or an e-port )uota applied to manufactured goods5 foreign e-porters tend to capture only a negligible
share of the )uota.s revenue effect.
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19. %hen increases in nonrestraint supply offset part of the cutback in shipments that occur under an
e-port )uota5 the overall inefficiency loss for the importing country is less than that which would have
occurred in the absence of nonrestrained e-ports.
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1;. 7-port )uotas5 placed on ,apanese auto shipments to the +nited !tates in the 1;9=s5 led to rising prices
of both ,apanese autos and +.!.&produced autos purchased by the +.!. consumer.
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$=. +nder the Eultifiber Arrangement5 the +nited !tates can e-port only limited )uantities of te-tiles and
apparel to Taiwan5 Hong Dong5 !outh Dorea5 and 1hina.
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$1. 3uring the 1;9=s5 +.!. steel&using companies B1aterpillarC actively supported the +.!. government.s
negotiation of voluntary e-port agreements with foreign steel&e-porting countries.
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$$. "y limiting the amount of foreign sourcing5 local content laws are viewed as a means of ?obs
preservation for domestic workers.
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$*. Local content laws stipulate the ma-imum percentage of a product.s total value that must be produced
domestically for that product to be sold domestically.
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$0. Local content laws are consistent with the principle of import substitution5 in which domestic
production replaces the importation of goods from abroad.
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$4. To the e-tent that a local content re)uirement forces firms to locate production in a high&cost nation5
product price rises and consumer surplus falls.
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$6. A subsidy granted to import&competing producers results in a welfare loss to the economy by an
amount e)ual to the protective effect plus the consumption effect.
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$8. A subsidy granted to import&competing producers is intended to lead to increased domestic production
and decreased imports for the home country.
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$9. A subsidy granted to an import&competing producer shifts its supply schedule outward to the right.
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$;. A subsidy granted to an import&competing producer imposes a deadweight loss on the domestic
economy e)ual to the redistribution effect plus consumption effect.
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*=. A subsidy granted to import&competing producers reduces overall domestic welfare by the same
amount as would a tariff or )uota that restricts imports by the same amount.
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*1. To the e-tent that subsidies granted to e-porting firms reduce the foreign price of their goods5 the
subsidiAing country.s terms of trade worsen.
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*$. If the +.!. demand for Dorean steel is price elastic5 an e-port subsidy granted to Dorean steel firms
will increase Dorea.s e-port revenue.
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**. International dumping occurs when foreign buyers are charged higher prices than domestic buyers for
an identical product5 after allowing for transportation costs and tariff duties.
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*0. !poradic BdistressC dumping would occur if domestic orange producers dispose of an e-cess )uantity
of oranges5 resulting from an abnormally large harvest5 by selling them at lower prices abroad than at
home.
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*4. #redatory dumping would occur if Toyota Inc. of ,apan sells autos to +.!. consumers at lower prices
than to ,apanese consumers in order to put 1hrysler Inc. out of business.
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*6. A firm would increase profits from dumping if it charges a lower price at home5 where demand is
inelastic5 and a higher price abroad where demand is elastic.
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*8. The purpose of international dumping is to decrease a firm.s costs and increase its profits5 compared to
what would be realiAed in the absence of dumping.
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*9. A firm granting lifetime employment to its workers has the incentive to engage in international
dumping during periods of business recession and e-cess production capacity.
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*;. A firm suffering idle plant capacity would minimiAe losses by selling its product abroad at a lower
price than at home5 provided that the foreign price more than covers average variable cost.
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0=. +nder +.!. antidumping law5 an antidumping duty can be levied when the +.!. 1ommerce 3epartment
determines that a foreign product is being sold in the +nited !tates at less than fair value and the +.!.
International Trade 1ommission determines that the dumped product is causing economic harm to
domestic producers.
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01. The margin of dumping e)uals the amount by which the foreign price is greater than the domestic
price5 or the amount by which the foreign price e-ceeds the cost of production.
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0$. <or most nations5 the ratio of imports to total purchases in the public sector is much higher than in the
private sector.
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0*. According to the +.!. "uy American Act5 federal government agencies cannot purchase materials and
products from +.!. suppliers if their prices are higher than those of foreign competitors.
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00. <or the +nited !tates5 the "uy American Act has tended to increase consumer surplus for +.!. buyers
of protected merchandise.
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04. An effective "uy American law would tend to increase +.!. producer surplus at the e-pense of +.!.
consumer surplus.
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06. An effective "uy American law results in deadweight welfare losses for the +nited !tates in the form
of the protective effect and consumption effect.
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08. Although the Tokyo 2ound of international trade negotiations reduced the "uy&American restrictions
of the +.!. government5 many state governments have maintained restrictive "uy&American policies.
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09. According to the cost&based definition of dumping5 dumping begins to occur when a firm sells a
product at a price that is less than average variable cost.
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0;. If the ,apanese demand for computers is elastic and the 1anadian demand for computers is inelastic5 a
profit&ma-imiAing firm would charge a higher price to 1anadian buyers than to ,apanese buyers.
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4=. If the Australian government imposes a domestic content re)uirement of 84 percent on autos5 at least
$4 percent of an auto.s value must be produced in a foreign country if that auto is to be sold in
Australia.
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41. 3uring the 1;9=s5 the +.!. government imposed sugar import )uotas in an attempt to reduce its costs
of maintaining price supports for +.!. sugar growers.
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Figure 5.5 illustrates the teleision market for Mexico, assumed to be a small country that is unable to
affect the world price. SMexico is the domestic supply schedule and *Mexico is the domestic demand
schedule. Suppose that 2apan can supply teleisions to Mexico at a price of !1## per set.
Figure 5.5. Me4i2!-$ Telei$i!n Mar.et
4$. 1onsider <igure 4.4. %ith free trade5 Ee-icans produce 0 T@s5 consume $0 T@s5 and import $= T@s.
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4*. 1onsider <igure 4.4. %ith free trade5 Ee-ican producer surplus e)uals F$04= and Ee-ican consumer
surplus e)uals F$==.
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40. 1onsider <igure 4.4. !uppose that the governments of Ee-ico and ,apan negotiate a voluntary e-port
agreement in which ,apanese T@ e-ports to Ee-ico are limited to 9 units. +nder the )uota5 the price of
T@s in Ee-ico e)uals F$4= while Ee-icans produce 1= T@s and purchase 19 T@s.
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44. 1onsider <igure 4.4. 1ompared to free trade5 the ,apanese e-port )uota leads to an increase in
Ee-ican consumer surplus of F*14=.
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46. 1onsider <igure 4.4. 1ompared to free trade5 the ,apanese e-port )uota leads to an increase in
Ee-ican producer surplus of F1=4=.
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48. 1onsider <igure 4.4. The deadweight welfare loss to Ee-ico5 as a result of the ,apanese e-port )uota5
totals F1$==.
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49. 1onsider <igure 4.4. The ,apanese e-port )uota.s revenue effect totals F1$==.
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4;. 1onsider <igure 4.4. The government of Ee-ico collects 4= percent of the e-port )uota.s revenue
effect5 or F6==5 in the form of ta- revenue.
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6=. 1onsider <igure 4.4. Assuming that the revenue effect of the e-port )uota accrues to ,apanese firms5
the overall welfare loss to Ee-ico e)uals F$1== as a result of the )uota.
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SHORT ANS5ER
1. Is a tariff&rate )uota a two&tier tariff' %hy'
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Jes. It allows a specified number of goods to be imported at one tariff rate5 whereas any imports above
this level face a higher tariff rate.
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$. %hat is an (EA'
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An (EA involves limitations on e-port sales administered by one or more e-porting nations.
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ESSA6
1. 3escribe some of the differences between tariffs and )uotas'
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Tariffs and )uotas differ in their revenue effects and restrictive impacts on the volume of trade. %hile
)uotas are easier to administer and manage5 they do not provide the government with revenue.
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$. %hat are the intent and impact of domestic content re)uirements'
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3omestic content re)uirements try to limit the practice of ?ob outsourcing and also encourage the
development of domestic industry. They stipulate the minimum percentage of a product.s value that
must be produced in the home country for that product to be sold there. 3omestic content protection
tends to impose welfare losses on the domestic economy in the form of higher production costs and
higher&priced goods.
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