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Suggested answer to case study discussion question
They Tax Exports, Too:There are a number of possible reasons that a country would limit the
export of a product like cotton. First, if the government uses a tax, it would gain revenue.
Second, the limit on exports would tend to force additional sales of the product in the local
market, so the domestic price would fall below the world price, and domestic consumers would
benefit. Third, if the country is a large exporter of the product, then the world price will rise
when the country exports less, and the country can gain from an increase in its terms of trade. An
export ban is an extreme limitation, and two of the three possibilities do not apply. There is no
government revenue. Even if the world price of the export product increases, there are no exports
on which to receive the gain from the higher price paid by foreigners. The most likely reason for
the Indian prohibition of cotton exports is then the one remaining, that the ban benefits the local
consumers of cotton. Domestic producers of textiles gain from the lower price of cotton, an input
into their production.
Suggested answers to end of chapter questions and problems
1. You can calculate it if you know only the size of the tariff and the amount by which it
would reduce imports. (See Figure 8.4.)
2. Agree. The tariff raises the domestic price of the imported product, and domestic
producers of the product raise their price when the domestic price of imports increases.
3. The production effect of a tariff is the deadweight loss to the nation that occurs because the
tariff encourages some high-cost domestic production (production that is inefficient by the
4. The consumption effect of a tariff is the loss of consumer surplus for the units that
consumers would consume with free trade but do not consume when the tariff increases
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5. a. Consumers gain $420 million per year.
6. For a small country the world price of $400 will not be affected by the tariff. The size of
the net national loss from imposing a $40 tariff will depend on the shapes of the domestic
supply and demand curves. The graph shows several possible domestic supply and
demand curves. (We will assume that supply and demand are straight lines.)
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7. a. Consumers gain $5,125,000.
8. If imports are 0.33 million bicycles, the tariff-inclusive price paid by domestic consumers
must be $350, and the export price is $250, so the tariff is $100 per bicycle. The
9. The $1.25 is made up of 60 cents of value added, 35 cents of cotton payments, and 30
10. The formula is one divided by the price elasticity of foreign supply of our imports. If the
11. Agree. Consider the example shown in Figure 8.5. The free-trade world price is $300 per
bike. The country then imposes a $6 tariff. Because the country is large, the price charged
by exporters falls to $297 per bike. With the $6 tariff, the domestic price rises to $303 per
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
12. With the domestic supply curve Sd, the domestic demand curve Dd, and the world price of
$150 per ton, the country would export (S0– D0) tons if there is no export tax. With the
export tax of $10 per ton, domestic firms receive $150 per ton from foreign buyers, but
the domestic firms must pay the government $10 for each ton exported. They have
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
62
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
