Econ Help

1. Which one of the following cannot be the argument for using the export tariff?

a. The export tariff will cause deadweight loss to a nation.

b. The export tariff will reduce the domestic price of the good that is to be exported and thus encourage the development of the domestic processing industries.

c. The export tariff is an important revenue source for some countries.

d. The export tariff will ensure that the domestic price is lower so that the product is affordable to people.

2. The optimal tariff rate of a large country is

a. zero.

b. negative.

c. a positive number.

d. the same as the effective rate of protection.

3. An export duty will

a. increase the export.

b. increase the domestic production of the exportable goods.

c. decrease the domestic consumption of the exportable goods.

d. decrease the export.

4. Which of the following is an argument for trade protection?

a. Free trade will lead to efficiency gains to a nation.

b. Industries in a development country need time to gain efficiency to compete in the future.

c. With trade protection, the market gets smaller.

d. There will be less technological transfer with trade protection.

5. Which one of the following correctly describes the "Dutch Disease"?

a. It is a disease that destroys the elm trees. The consequence of this disease is to lower national income and thus result in social instability.

b. When the Dutch discovered the natural gas in the North Sea, its natural gas related industry expands resulting in the depreciation of its currency, and thus leading to the increased competitiveness of its traditional industries.

c. When the Dutch discovered the natural gas in the North Sea, its natural gas related industry shrinks resulting the appreciation of its currency, and thus leading to the decreased competitiveness of its traditional industries.

d. When the Dutch discovered the natural gas in the North Sea, its natural gas related industry expands resulting in the appreciation of its currency, and thus leading to the decreased competitiveness of its traditional industries.

II. Please answer each question in the space provided. Do not feel compelled to fill the entire space. Complete but concise answers are appreciated. (10 points each)

1. In the following diagram, D and S are the US domestic demand and supply curves of orange juice. P* is the world market price and t is the tariff rate. The fact that 90% of the US orange juice is consumed domestically and 90% of the Brazilian OJ is exported suggests that US can be regarded as a small country in the world OJ market. Thus US takes P* as given.

a. Assuming perfect competition, what is the domestic price of orange juice? What is the total import?

Domestic price of orange juice = P*+t

Total imports = q2 - q1

b. By how much is the consumer worse off? By how much is the domestic producer better off? How does the tariff affect the welfare of the nation?

By not taking the world price, the consumer loses areas a, b, c and d.

The producer gains area a, and the government takes area c.

Net welfare loss is areas b and d.

c. How does the above result change if the U.S. were a large country in the OJ market (i.e., US tariff can change the world price of OJ)? Please draw a diagram similar to the above one to demonstrate this.

There is a gain of area e, but a loss of area b and d. Importers lower export price to Pi when the tariff is imposed, thereby paying for area e. Areas b and d are still efficiency losses, but there is obviously an overall gain.

d. What other government policies can be used to achieve the same results of protecting the US OJ producers? Use the small country diagram to illustrate this.

They can put a quota on OJ imports in the amount of q2 - q1. This would have the same effect. If the quota license is auctioned at a competitive market, the government still gets c. The welfare effect in this case is the same as the tariff.