International Economics Tutorial 6

The answers of the MC questions will be published the day before the tutorial. The answers of
the open questions are only discussed during the tutorial and will not be published.

MC Questions

1. Refer to the diagram below. The closed-economy equilibrium price is $14. The world price is $4.
What is the quantity of imports at the world price of $4?
Imports = …… units.
By how much will imports be reduced with the introduction of the $2 tariff?
Imports decrease by …….. units.
How much tariff revenue is generated by the $2 addition?
Tariff revenue = $..........

2. What does the term "import demand" describe?

A. The excess of foreign supply over foreign demand.
B. The excess of domestic demand over domestic supply.
C. Demand for a good the country would like to import because it does not produce this good
domestically.
D. Relative demand for the importing country.
International Economics Tutorial 6 Chapter 9
3. Which of the following is NOT true about the export supply curve?
A. It is steeper than the domestic supply curve in the exporting country.
B. It is flatter than the domestic supply curve in the exporting country.
C. It describes the excess of foreign supply over foreign demand.
D. It intersects the vertical axis at the foreign equilibrium price in autarky equilibrium.

4. What is the definition of a "small" country?

A. A country in which export supply is larger than domestic supply
B. A country that cannot function without international trade.
C. A country in which import demand is larger than domestic demand.
D. A country that cannot affect its terms-of-trade.

5. The importing country shown in the figure above imposes a tariff that raises the domestic price
from 𝑝w to 𝑝𝑇 but lowers the foreign export price from 𝑝w to 𝑝T*. As a result of this tariff, consumers
in the importing country:
A. experience a loss given by (c + e).
B. experience a loss given by (b + d).
C. experience a loss given by (a + b + c + d).
D. experience a loss given by (a + b).

6. As a result of this tariff, producers in the importing country.

A. experience a loss given by (e).
B. experience a gain given by (c).
C. experience a gain given by (a),
D. experience a gain given by (b + c + d).

7. As a result of this tariff, the government of the importing country

A. experiences a gain given by (c + e).
B. experiences a loss given by (b + d).
C. experiences a loss since (a > (b + c + d)).
D. experiences a gain given by (c).
8. The net welfare COST of this tariff on the importing country is given by:
A. (b + d - e).
B. (c + e).
C. (b + d).
D. (a + c + e).

9. In the figure below, the importing country imposes a tariff that raises the domestic price from $4
to $6 but lowers the foreign export price from $4 to $2. As a result of this tariff, consumers in the
importing country:
A. experience a welfare loss valued at $6.
B. experience a welfare loss valued at $15.
C. experience a welfare loss valued at $17.
D. experience a welfare loss, but a monetary value is impossible to compute.

10. The net welfare gain from this tariff for the importing country is:
A. $2.
B. $17.
C. $9.
D. $8.

11. An import tariff imposed by a large country affects income distribution in the following way:
A. An importing country as a whole unambiguously loses from the tariff
B. Consumers lose in the importing country and gain in the exporting country, while producers
gain in the importing country and lose in the exporting country.
C. Consumers gain in the importing country and lose in the exporting country, while producers
lose in the importing country and gain in the exporting country.
D. Consumers and producers lose in the importing country and gain in the exporting country.
12. Suppose that workers involved in manufacturing are paid less than all other workers in the
economy. What would be the effect on the real income distribution within the economy if there
were a substantial tariff levied on manufactured goods?
A. Income distribution would improve because wages in manufacturing would increase, and
real income would increase for other sectors because of higher prices for manufactured
goods.
B. Income distribution would worsen because wages in manufacturing would decrease, and
real income would decrease for other sectors because of higher prices for manufactured
goods.
C. Income distribution would worsen because wages in manufacturing would increase, and
real income would decrease for other sectors because of higher prices for manufactured
goods.
D. Income distribution would improve because wages in manufacturing would increase, and
real income would decrease for other sectors because of higher prices for manufactured
goods.

13. How is an export subsidy by a large country different from an import quota by a large country?
A. They are not different. The effects on income distribution are the same.
B. An export subsidy improves terms of trade while an import quota worsens them.
C. Unlike the welfare effects of an import quota, the welfare effects of an export subsidy
are ambiguous.
D. An export subsidy worsens terms of trade while an import quota improves them.

14. Give an intuitive explanation for the optimal tariff argument.

A. In a large country, a tariff or export subsidy can favorably shift the terms of trade
such that the tariff revenue exceeds the welfare loss.
B. In a small country, a tariff or export subsidy can favorably shift the terms of trade
such that the tariff revenue exceeds the welfare loss.
C. In a small country, a tariff or quota can favorably shift the terms of trade such that
the tariff revenue exceeds the welfare loss.
D. In a large country, a tariff or quota can favorably shift the terms of trade such that
the tariff revenue exceeds the welfare loss.

15. Which of the following statements regarding import-substituting industrialization is NOT true?
A. It was very common among less-developed countries.
B. It explains the East-Asian "Miracle."
C. It leads historically to inefficient high-cost production.
D. It leads to export reduction.
Open questions
Exercise 1: Export supply and import demand
The figures below show the market for bikes in home and foreign.

a) Derive and draw the import demand and export supply curves. Explain why the import demand
curve is flatter than the demand curve in the importing country.
b) What is the world equilibrium price?
c) In equilibrium, what is the world supply of bikes?
d) Suppose Home imposes a tariff. What happens to the import demand and export supply curves
and the price on world markets? Illustrate the new situation with a graph.

Exercise 2: Tariffs and prices

Assume 𝑆 = 20 + 20𝑃 and 𝐷 = 100 − 20𝑃 are Home's supply and demand curves for wheat. Further,
assume 𝑆* = 40 + 20𝑃 and 𝐷∗= 80 − 20𝑃 are Foreign's supply and demand curves for wheat.
a) Calculate the free trade price of wheat.

Suppose Home imposes a specific tariff of $0.50 on wheat.

b) What will Home consumers pay? What is Foreign’s export price?

Now assume that foreign is a much larger country. Specifically, Foreign's demand curve for wheat is
𝐷∗= 800 − 200𝑃. Its supply curve is 𝑆∗ = 400 + 200𝑃.
c) How does this change your answer to the questions a) and b)?
d) How do the gains in terms of trade after a tariff is introduced depend on the relative size of the
country?

Exercise 3: Tariffs and welfare effects

Consider the country Isla del Restrictio, that has decided to implement an import quotum on good
X. The world price of good X is 20 euros. The demand curve for good X is: 𝐷=500−10𝑃. The supply
curve is 𝑆=5𝑃. The import quotum restricts imports to 50 units.
a) Calculate the equilibrium before the imposition of the trade quotum and illustrate the situation
with a graph. How many units are imported?
b) Calculate the equilibrium when the quotum is installed and illustrate the situation with a graph.
c) Calculate the loss of consumer surplus and show the area of consumer surplus on the graph in b).
d) Calculate the gain in producer surplus and show the area of producer surplus on the graph in b.
e) Calculate the quota rents show the area of quota rents on the graph in b). Who receives those
rents?
Exercise 4: Efficient trade and economies of scale
The figure to the right shows curves representing the average cost of golf clubs produced in
Scotland (ACS) and Malaysia (ACM) as well as the world demand (D) for golf clubs. It is assumed
that the world demand for clubs can be satisfied entirely by either country.
Assume that by historical accident, Scottish golf club producers are the first to be established.
a) Is the production of golf clubs characterized by economies of scale?
b) What will be the market equilibrium?
c) Suppose trade is not possible. Can Scotland be better off? Can Malaysia be better off? If
yes, under what condition?
d) Explain how economies of scale can lead to market inefficiencies.
e) What could the Malaysian government do to improve the situation?

Exercise 5: Economies of scale and labor market pooling

In our discussion of labor market pooling, we stressed the advantages of having two firms in the
same location: If one firm is expanding while the other is contracting, it's to the advantage of
both workers and firms that they be able to draw on a single labor pool. But it might happen that
both firms want to expand or contract at the same time. Does this constitute an argument
against geographical concentration?
To answer this question, imagine that there are two companies that both use the same kind of
specialized labor, say, two film studios that make use of experts in computer animation. Suppose
that there are 200 workers with this special skill.

Now compare two different scenarios: In scenario 1, both firms and all 200 workers are in the
same city, and each firm is able to hire 100 workers. In scenario 2, the two firms, each with 100
workers, are in two different cities.

Now suppose that both firms are expanding, increasing their demand for labor up to 195 each.
Fill out the words and numbers in italics:

• In the first scenario, each firm will face a local labor surplus/shortage of X workers
• In the second scenario, each firm will face a local labor surplus/shortage of X workers
 • Hence, locating next to each other does not present any / presents
employmentdisadvantages over locating far apart when both firms are
expanding.

Question 6: theory on trade barriers

a) What is the median voter theorem?
b) What does this theory predict for trade barriers? Why does this prediction not hold in
practice?

One argument to protect domestic industries in developing countries is the import-substitution

argument: Developing countries can only grow when the domestic industry is protected against
imports. An alternative strategy is export-led growth and trade liberalization. There has been
debate which strategy is best.

c) Why don’t countries stimulate both import-substitution and export-led growth? Explain why
this is difficult or impossible?

Exercise 7: trade and economies of scale

a) Explain why economies of scale can give rise to international trade.
b) Previous theories of trade -Ricardo, Heckscher-Ohlin- explain trade based on comparative
advantage. What trade patterns that cannot be explained by those theories can be
explained by trade based on economies of scale?
c) Explain the difference between internal and external economies of scale and what this
difference implies for the resulting market structure.
d) An economist argues that trade based on economies of scale can explain any trade pattern,
and therefore explains nothing. Comment on this statement.