SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Since wool suits are cheaper in neighboring countries, Autarka would import suits
2. Figure 1 shows the supply and demand for wool suits in Autarka. With no trade,
Figure 1
3. Lobbyists for the textile industry might make )ve arguments in favor of a ban on
In defending free trade in wool suits, you could argue that: (1) free trade creates
151
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Chapter 9/Application: International Trade ❖ 152
Chapter Quick Quiz
1. a
Questions for Review
1. If the domestic price that prevails without international trade is above the world
2. A country will export a good for which its domestic price is lower than the
3. Figure 2 illustrates supply and demand for an importing country. Before trade is
Figure 2
4. A tari& is a tax on goods produced abroad and sold domestically. If a country is an
5. The arguments given to support trade restrictions are: (1) trade destroys jobs; (2)
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
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Chapter 9/Application: International Trade ❖ 153
6. A unilateral approach to achieving free trade occurs when a country removes
trade restrictions on its own. Under a multilateral approach, a country reduces its
Problems and Applications
1. a. Figure 4 illustrates the Canadian market for wine, where the world price of
Figure 4
b. The shift in the Gulf Stream destroys some of the grape harvest in Europe and
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on a password-protected website or school-approved learning management system for classroom use.
P1P2CHANGE
Chapter 9/Application: International Trade ❖ 154
2. The impact of a tari& on imported automobiles is shown in Figure 6. Without the
tari&, the price of an auto is PW, the quantity produced in the United States is Q1S,
Figure 6
Before Tarif After Tarif CHANGE
3. a. For a country that imports clothing, the e&ects of a decline in the world price
are shown in Figure 7. The initial price is Pw1 and the initial level of imports is
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Chapter 9/Application: International Trade ❖ 155
Figure 7 Figure 8
Pw1 Pw2 CHANGE
b. For a country that exports clothing, the e&ects of a decline in the world price
Pw1 Pw2 CHANGE
Consumer
Surplus
A A + B + C B + C
c. Overall, importing countries bene)t from the fall in the world price of clothing,
4. a. While there are many possible answers, one correct answer is: the jobs
b. While there are many possible answers, one correct answer is: the
national-security argument and the infant-industry argument. The economic
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Chapter 9/Application: International Trade ❖ 156
5. a. Figure 9 shows the market for T-shirts in Textilia. The domestic price is $20
Once trade is allowed, the price drops to $16 and three million T-shirts are
imported.
Figure 9
b. Consumer surplus increases by areas A + B + C. Area A is equal to ($4)(1
million) +(0.5)($4)(2 million) = $8 million. Area B is equal to (0.5)($4)(2
6. a. Figure 10 shows the market for grain in an exporting country. The world price
is PW.
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Chapter 9/Application: International Trade ❖ 157
Figure 10
b. An export tax will reduce the e&ective world price received by the exporting
c. An export tax will increase domestic consumer surplus, decrease domestic
d. Total surplus will fall because the decline in producer surplus is less than the
7. a. This statement is true. For a given world price that is lower than the domestic
b. This statement is false. Quantity demanded would remain unchanged, but
c. This statement is false. Even though quantity demanded does not rise when
8. a. Using Figure 4 from the text, the quantity demanded will fall to Q2D, the same
b. The e&ects of the consumption tax can be seen in the table below:
World price World price + tax CHANGE
c. The consumption tax raises more government revenue because the tax is on
9. a. When a technological advance lowers the world price of televisions, the e&ect
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
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Chapter 9/Application: International Trade ❖ 158
Figure 13
P1P2CHANGE
G
b. The areas are calculated as follows: Area C = 200,000($100) + (0.5)(200,000)
($100)
c. If the government places a $100 tari& on imported televisions, consumer and
producer surplus would return to their initial values. That is, consumer surplus
would fall by areas C + D + E + F (a decline of $110 million). Producer surplus
d. It makes no di&erence why the world price dropped in terms of our analysis.
10. An export subsidy increases the price of steel exports received by producers by
the amount of the subsidy, s, as shown in Figure 14. The )gure shows the world
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
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Chapter 9/Application: International Trade ❖ 159
Figure 14
Thus, it is not a good policy from an economic standpoint because there is a
decline in total surplus.
Without
Subsidy
With Subsidy CHANGE
G
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
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