International Economics, 7e (Gerber)
Chapter 6 The Theory of Tariffs and Quotas
6.1 Introduction: Tariffs and Quotas
1) In a small country, the net national cost of tariff protection is equal to the reduction in
consumer surplus minus
A) the increase in government revenue and the increase in producer surplus.
B) the increase in government revenue.
C) the increase in producer surplus.
D) the efficiency loss and the consumption side loss.
Scenario 6.1
Suppose that United States furniture makers import $100 of wood and parts in order to make a
dining room table selling for $500. The imports have no tariff or quota restrictions.
2) Based on Scenario 6.1 above, value added in the United States is
A) $500.
B) $600.
C) $400.
D) $300.
3) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room
tables, the effective rate of protection is
A) 20 percent.
B) 25 percent.
C) 30 percent.
D) 40 percent.
4) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room
tables, and another tariff of 50 percent is placed on imports of wood and parts, then the effective
rate of protection on tables made in the United States is
A) 70 percent.
B) 50 percent.
C) 20 percent.
D) 12.5 percent.
5) Consumer surplus is equal to the area
A) under the demand curve and above the supply curve.
B) above the supply curve and below the price line.
C) under the demand curve.
D) under the demand curve and above the price line.
6) Producer surplus is equal to the area
A) under the demand curve and above the supply curve.
B) above the supply curve and below the price line.
C) under the supply curve.
D) under the demand curve and above the price line.
7) Tariffs reallocate income from
A) consumers to producers.
B) producers to consumers.
C) government to producers.
D) consumers to foreigners.
8) The production side efficiency loss of a tariff is caused by
A) higher profits gained by foreign producers.
B) the expansion of relative inefficient domestic production.
C) the contraction of domestic consumption.
D) the increase in government revenue.
9) Which of the following would be a deadweight loss from a tariff?
A) The shift of consumer surplus to government
B) The increase in producer surplus
C) The decrease in consumer surplus
D) The decrease in consumer surplus due to a drop in consumption
10) Large countries can improve their welfare by levying a tariff if it does NOT
A) reduce rent seeking elsewhere in the economy.
B) create a deadweight loss.
C) lead to retaliation by the nation’s trading partners.
D) increase domestic production of the good.
11) Suppose a manufacturer of software develops a new computer program that sells for $50.
The $50 cost includes $0.25 for the CD it is stored on, $5 for the labor of the company software
programmers, and $1.75 for packaging materials and transportation costs. Value added by the
software company is
A) $49.75.
B) $48.25.
C) $48.
D) $44.75.
12) High tariffs on intermediate inputs
A) increase the effective rate of protection on final goods.
B) have no impact on the effective rate of protection on final goods.
C) decrease the effective rate of protection on final goods.
D) lower the nominal rate of protection on final goods.
13) Which of the following is NOT correct about the effects of a tariff on an imported product?
A) Tariffs benefit domestic producers by raising price and domestic output.
B) Tariffs increase government revenue.
C) Tariffs mean higher prices and less consumption for consumers of the product.
D) Tariffs increase the efficiency of how resources are allocated.
14) Which of the following is FALSE?
A) Consumer surplus increases after a tariff is placed on imports.
B) Producer surplus increases after a tariff is imposed.
C) Government revenue increases after a tariff is imposed.
D) Deadweight losses result from tariffs.
15) Efficiency losses are
A) deadweight losses caused by consumers being prevented by tariffs from buying products at
the world price, products that they value more highly than that price.
B) the total loss in consumer surplus from a tariff.
C) the increase in producer surplus that is created by a tariff.
D) the deadweight loss that is created because domestic firms have to charge higher prices to
produce units of output than foreign firms would have to charge.
16) In order for large countries to successfully use tariffs to increase well-being,
A) they must have significant market power .
B) the deadweight loss created by the tariff must be greater than the government revenue the
tariff generates.
C) domestic production must increase more significantly than for the small country case.
D) domestic consumption and imports must decrease more significantly than in the small country
case.
17) Nominal rates of protection
A) are always greater than effective rates of protection.
B) are always smaller than effective rates of protection.
C) refer to the tariffs placed on intermediate goods used to make the final good or service.
D) cannot be negative.
18) Which of the following is a FALSE statement about issues/negotiations in the Doha
Development agenda?
A) It is intended to deal with economic development issues and trade barriers facing developing
countries that were not adequately addressed in the Uruguay Round.
B) Many developing countries are upset with the levels of tariffs and other barriers that
industrialized countries use to protect agriculture, clothing and textiles.
C) Industrialized countries want developing countries to reduce their tariffs, which on average
are higher than the rates of richer countries.
D) Developing countries don’t use tariffs, and they want higher income countries to follow their
model.
19) Average tariff rates are highest for
A) high-income countries.
B) middle-income countries.
C) low-income countries.
D) industrialized countries.
Use the graph below and the following information to answer the next question(s). The world
price of soybeans is $2.00 per bushel, and the importing country is small enough not to affect the
world price.
Figure 6.1
20) Based on Figure 6.1, suppose the government puts a tariff of $0.25 per bushel on soybean
imports. How much will the tariff reduce imports?
A) Imports will decrease by 10 million bushels.
B) Imports will decrease by 20 million bushels.
C) Imports will decrease by 60 million bushels.
D) Imports will not change after the tariff.
21) Based on Figure 6.1, given a tariff of $0.25 per bushel on soybean imports, how much will
domestic production increase?
A) Domestic firms will increase output by 10 million bushels.
B) Domestic firms will increase output by 20 million bushels.
C) Domestic firms will increase output by 70 million bushels.
D) Domestic firms’ production will not be changed by the tariff.
22) Based on Figure 6.1, how much revenue will the government raise from a $0.25 per bushel
tariff on soybean imports?
A) The government will raise $2.5 million.
B) The government will raise $5 million.
C) The government will raise $15 million.
D) The government will raise $32.5 million.
E) The government will see no increase in income; because the country is small, foreign firms
will simply not serve it after the tariff is imposed.
23) Which of the following is FALSE?
A) Tariffs are a relatively easy tax to administer and often form an important part of revenue for
low-income countries.
B) Taxes on income, sales, and property require more complex accounting systems than do
tariffs.
C) Low-income countries often have large informal markets with the sales of many goods and
services not being recorded, which makes it difficult to apply many kinds of taxes.
D) Tariffs are not an attractive tax option for most low-income countries, so they mostly rely on
quota licenses for revenue.
24)
The graph above shows supply and demand in the domestic market without trade. Consumer
surplus without trade is represented by area
A) P1-E-Po
B) P1-E-0
C) Po-E-0
D) P1-E-Qo
25)
The graph above shows supply and demand in the domestic market without trade. Producer
surplus without trade is represented by area
A) P1-E-Po
B) P1-E-0
C) Po-E-0
D) P1-E-Qo
26) The new GATS and TRIPS are separate agreements negotiated within the WTO framework
as part of the Uruguay Round that apply to
A) services and transportation.
B) agriculture and textiles.
C) services and intellectual property.
D) textiles and transportation.
27)
The graph above shows domestic supply and demand with trade. With trade, this country can
purchase at the world price, Pw.
Which of the following areas represents consumer surplus with trade?
A) Pw-A-0
B) Pw-B-Qd-0
C) P1-B-Pw
D) P1-B-A-0
28)
The graph above shows domestic supply and demand with trade in a SMALL country. With
trade, this country can purchase at the world price, Pw.
Suppose that this country imposes a $5 per unit tariff on this good. Which of the following will
NOT occur?
A) Government revenue will increase.
B) Domestic consumers will be worse off.
C) Domestic producers will be better off.
D) The gains to the winners will exceed the losses to the losers from the tariff.