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1. Which of the following was the subject of a major disagreement during the Doha Round?
a. tariffs on agricultural imports in developing countries
b. agricultural subsidies
c. production subsidies to agriculture in land-poor developing countries
d. tariffs on agricultural imports in developed countries

ANSWER: b

2. A tax on exports is an:

a. export tariff.
b. export stipend.
c. export restriction.
d. export quota.

ANSWER: a

3. A payment to a firm for every unit exported is called an:

a. export tariff.
b. export stipend.
c. export restriction.
d. export subsidy.

ANSWER: d

4. An example of an export tariff is:

a. China's limits on rare earth mineral exports.
b. Argentina's 30% tax on soybean exports.
c. the United States' 10% tax on Boeing aircraft exports.
d. Japan's 20% tax on rice exports.

ANSWER: b

5. In 2015, WTO leaders agreed to:

a. eliminate taxes on their agricultural exports.
b. eliminate subsidies on their agricultural exports.
c. eliminate countervailing duties on subsidized agricultural imports.
d. eliminate antidumping duties on subsidized agricultural imports.

ANSWER: b

6. Under terms of the 2015 meeting of the WTO, deadlines were set between 2015 and 2018 for the elimination
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of agricultural export subsidies, depending on countries’ levels of economic development. Those deadlines were
later extended, moving to:
a. 2020 for developed countries, 2023 for developing countries, and 2030 for the least developed
countries.
b. 2020 for the least developed countries, 2023 for developing countries, and 2030 for developed
countries.
c. 2023 for developed countries and 2030 for all developing countries.
d. 2023 for all countries.

ANSWER: a

7. In general, an export subsidy:

a. discourages foreign sales in favor of domestic sales.
b. encourages firms to export rather than sell domestically.
c. penalizes producers that export.
d. justifies government involvement in helping firms export.

ANSWER: b

8. Any assistance given to farmers through government programs can often be referred to as:
a. indirect subsidies.
b. export subsidies.
c. import subsidies.
d. domestic farm supports.

ANSWER: d

9. In Europe, the Common Agricultural Policy is a form of:

a. tax on domestic production of agricultural products.
b. regulation and supervision by the WTO in ensuring that tariffs are applied fairly.
c. a purchase program whereby government buys unusable products.
d. subsidy, regardless of whether the crop is sold domestically or internationally.

ANSWER: d

10. The European agricultural export subsidy program is known as the:

a. European Subsidy System.
b. European Agricultural System.
c. Common Agricultural Policy.
d. Common European Policy.
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ANSWER: c

11. In Europe, the Common Agricultural Policy:

a. taxed European agricultural products sold in Europe.
b. allowed European farmers to sell their output at above world prices in the European market.
c. subsidized agricultural products, allowing European farmers to sell output at a price much higher
than the world market price.
d. subsidized agricultural products, allowing European farmers to sell output at a price much lower than
the world market price.

ANSWER: d

12. In a clear example of the benefits of domestic subsidies, the Common Agricultural Policy paid European
farmers 50 euros per ton of harvested sugar beets in 2003 (five times the world market price), which allowed:
a. European farmers to charge less than the world market price, undercutting competitors.
b. American consumers to enjoy much cheaper domestically grown beets.
c. beet farmers worldwide to enjoy more competition in the beet market, a phenomenon heralded by
free-market economists.
d. European farmers to switch production to other agricultural goods that were more lucrative.

ANSWER: d

13. Where were subsidies on agricultural products particularly high prior to the 2015 WTO agreement on
agricultural export subsidies?
a. the European Union
b. Korea
c. Russia
d. Canada

ANSWER: a

14. The European Common Agricultural Policy resulted in a(n):

a. increase in European imports from the rest of the world.
b. decrease in European exports of sugar to the rest of the world.
c. increase in world agriculture exports to Europe.
d. increase in European agriculture exports.

ANSWER: d

15. Under rules of the GATT, exporting countries can expect importing countries to impose _______ to offset
their export subsidies.
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a. antidumping duties
b. countervailing duties
c. safeguard duties
d. quotas

ANSWER: b

16. Under the GATT, which trade remedy can importing countries use to offset export subsidies?
a. antidumping duties
b. safeguard duties
c. quotas
d. countervailing duties

ANSWER: d

17. Which of the following is NOT an example of countries' support for their domestic agricultural industry?
a. The European Common Agricultural Policy pays European farmers up to 50 euros per ton of
harvested sugar beets.
b. Japan allows 10% of its annual rice consumption to enter duty-free, then imposes a 500% tariff on
further rice imports.
c. The United States provides subsidies to cotton farmers to grow more cotton.
d. Argentina imposes a 23% tax on wheat exports.

ANSWER: d

18. Which product has been among the most heavily subsidized in the United States?
a. cotton
b. grapes
c. oranges
d. tomatoes

ANSWER: a

19. Which of the following was the subject of a WTO case brought by Brazil against the United States?
a. In the mid-1990s, the United States was heavily subsidizing its tobacco industry, reducing the value
of Brazilian cigarettes.
b. Brazilian asparagus was seen as an infant industry in 2011, so Brazil applied a universal ban on
asparagus imports.
c. The United States manipulated its currency in 2006, which the Brazilian government argued caused a
major economic crash.

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d. In the early 2000s, the United States was heavily subsidizing its cotton industry, allowing it to drive
down prices in the world market.

ANSWER: d

20. WTO negotiations in 2005 covered agricultural subsidies. What progress was made at these meetings in
Hong Kong?
a. Higher-income nations pushed for an end to agricultural subsidies but did not succeed.
b. Goals were set to abolish agricultural subsidies by the end of 2013, but no actual changes occurred.
c. The Hong Kong meetings were disrupted by protesters and had to be called off.
d. The WTO members agreed to immediately eliminate agricultural subsidies in all countries.

ANSWER: b

21. Though it was discussed at the 2005 Hong Kong meeting of the WTO:
a. no special safeguard mechanism could be arranged whereby tariffs could be applied to all other
nonsubsidized agricultural products when imports suddenly rose or prices suddenly fell.
b. it took another decade to agree on a special safeguard mechanism whereby tariffs could be applied to
all other nonsubsidized agricultural products when imports suddenly rose or prices suddenly fell.
c. the United States did not fully eliminate its subsidies on domestic cotton production and manufacture
until the following year, when the WTO submitted a formal request.
d. no agreement could be reached concerning the abolition of agricultural export subsidies.

ANSWER: b

22. An export subsidy works to _______________ the price of exported products for producers to encourage
_______________ production.
a. lower; less
b. lower; more
c. raise; more
d. raise; less

ANSWER: c

23. Which of the following will happen when a small country enacts an export subsidy?
a. The country will be able to sell less abroad.
b. The domestic price of the subsidized export will decrease
c. The country's demand for the subsidized product will increase.
d. Foreign demand for the subsidized product will increase.

ANSWER: d
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24. When a small country enacts an export subsidy, which of the following will NOT occur?
a. Foreign demand for the subsidized product will increase.
b. Domestic producers will benefit from higher quantities demanded from abroad.
c. Domestic demand for the subsidized product will increase.
d. Foreign producers will observe decreases in demand for their similar products.

ANSWER: c

25. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy
of $50 per ton, then the world price of sugar will:
a. rise to $150 per ton.
b. fall to $50 per ton.
c. remain at $100 per ton.
d. first rise to $150 per ton, then fall to $100 per ton.

ANSWER: c

26. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy
of $50 per ton, then its exporters will receive:
a. $150 per ton.
b. $50 per ton.
c. $100 per ton.
d. first $150 per ton, then $100 per ton.

ANSWER: a

27. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy
of $50 per ton, then its domestic price of sugar will:
a. fall by $50 per ton.
b. rise by $50 per ton.
c. remain unchanged at $100 per ton.
d. first fall to $50 per ton, then rise to $100 per ton.

ANSWER: b

28. Suppose that the world price of sugar is $100 per ton. If a small country gives its sugar exporters a subsidy
of $50 per ton, then domestic consumption of sugar will:
a. fall.
b. rise.
c. remain unchanged.
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d. first fall, then rise.

ANSWER: a

29. In autarky, suppose that the equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation.
Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per
ton. What will happen to the domestic price of sugar in Birdonia?
a. It will rise to $125 per ton.
b. It will fall by $25 per ton.
c. It will remain $100 per ton.
d. It will first rise to $125 per ton, then fall to $100 per ton.

ANSWER: a

30. In autarky, suppose that the equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation.
Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per
ton. Now suppose that the government of Birdonia gives an export subsidy of $50 per ton to its sugar producers.
What will happen to the domestic price of sugar in Birdonia?
a. It will not change.
b. It will rise to $175 per ton.
c. It will rise to $150 per ton.
d. It will rise to between $125 and $175 per ton.

ANSWER: b

31. In autarky, suppose that the equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation.
Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per
ton. Now suppose that the government of Birdonia gives an export subsidy of $50 per ton to its sugar producers.
What will happen to the world price of sugar?
a. It will not change.
b. It will rise to $175 per ton.
c. It will rise to $150 per ton.
d. It will rise to between $125 and $175 per ton.

ANSWER: a

32. In autarky, suppose that the equilibrium sugar price is $100 per ton in Birdonia, a small agricultural nation.
Now, suppose Birdonia engages in free trade with the rest of the world. The world price of sugar is $125 per
ton. What action must the government of Birdonia take to ensure that Birdonians do not import sugar at the
world price of $125?
a. It must place a $25 per ton tax on Birdonian sugar exports.

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b. It must levy a countervailing duty of $50 a ton on Birdonian sugar exports.

c. It must agree to voluntarily restrain its exports to $125 per ton.
d. It must levy a tariff of $50 per ton on imported sugar.

ANSWER: d

33. Table: Demand and Supply for Iron Ore

Price/ton Quantity demanded (tons) Quantity supplied (tons)

$100 10 100

$90 20 90

$80 30 80

$70 40 70

$60 50 60

$50 60 50

$40 70 40

$30 80 30

$20 90 20

$10 100 10

This table represents a demand and supply schedule for a small-country producer of iron ore that sells output in
its home market and on the world market at the world price of $70 per ton. At the world price of $70 per ton,
how many tons will be sold domestically?
a. 80 tons
b. 70 tons
c. 40 tons
d. 30 tons

ANSWER: c

34. Table: Demand and Supply for Iron Ore

Price/ton Quantity demanded (tons) Quantity supplied (tons)

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$100 10 100

$90 20 90

$80 30 80

$70 40 70

$60 50 60

$50 60 50

$40 70 40

$30 80 30

$20 90 20

$10 100 10

This table represents a demand and supply schedule for a small-country producer of iron ore that sells output in
its home market and on the world market at the world price of $70 per ton. At the world price of $70 per ton,
how many tons will it export?
a. 80 tons
b. 70 tons
c. 40 tons
d. 30 tons

ANSWER: d

35. Table: Demand and Supply for Iron Ore

Price/ton Quantity demanded (tons) Quantity supplied (tons)

$100 10 100
$90 20 90
$80 30 80
$70 40 70
$60 50 60
$50 60 50
$40 70 40
$30 80 30
$20 90 20
$10 100 10

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This table represents a demand and supply schedule for a small-country producer of iron ore that sells output in
its home market and on the world market at the world price of $70 per ton. How many tons will be sold
domestically when exporters receive a $10 per ton export subsidy?
a. 10 tons
b. 20 tons
c. 30 tons
d. 40 tons

ANSWER: c

36. Table: Demand and Supply for Iron Ore

Price/ton Quantity demanded (tons) Quantity supplied (tons)

$100 10 100

$90 20 90

$80 30 80

$70 40 70

$60 50 60

$50 60 50

$40 70 40

$30 80 30

$20 90 20

$10 100 10

This table represents a demand and supply schedule for a small-country producer of iron ore that sells output in
its home market and on the world market at the world price of $70 per ton. What price will domestic iron ore
consumers pay for their iron ore purchases when there is a $10 per ton export subsidy?
a. $10 per ton
b. $60 per ton
c. $70 per ton
d. $80 per ton

ANSWER: d

37. Table: Demand and Supply for Iron Ore

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Price/ton Quantity demanded (tons) Quantity supplied (tons)

$100 10 100

$90 20 90

$80 30 80

$70 40 70

$60 50 60

$50 60 50

$40 70 40

$30 80 30

$20 90 20

$10 100 10

This table represents a demand and supply schedule for a small-country producer of iron ore that sells output in
its home market and on the world market at the world price of $70 per ton. What is the total value of the export
subsidy that exporters receive?
a. $500
b. $800
c. $400
d. $100

ANSWER: a

38. Figure: Home's Exporting Industry 1

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The graph shows information about a small home exporter. D is home demand and S is home supply. According
to the graph, how many units of the product will domestic consumers demand when the world price is $125?
a. 120
b. 100
c. 40
d. 20
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ANSWER: c

39. Figure: Home's Exporting Industry 1

The graph shows information about a small home exporter. D is home demand and S is home supply. According
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to the graph, at the world price of $125 there is a ________ of ____ in the home market, which is ____.
a. surplus; 60; imported
b. shortage; 60; imported
c. surplus; 60; exported
d. shortage; 100; exported

ANSWER: c

40. Figure: Home's Exporting Industry 1

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The graph shows information about a small home exporter. D is home demand and S is home supply. According
to the graph, when the home country provides a subsidy of _______, exports will increase by _____ units.
a. $50; 40
b. $175; 120
c. $125; 100
d. $175; 100
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ANSWER: a

41. Figure: Home's Exporting Industry 1

The graph shows information about a small home exporter. D is home demand and S is home supply. According
to the graph, an export subsidy of $50 per unit results in a(n) ________ of government revenue by the amount
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of ______.
a. increase; $5,000
b. increase; $2,500
c. decrease; $5,000
d. decrease; $21,000

ANSWER: c

42. Figure: Home's Exporting Industry 1

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The graph shows information about a small home exporter. D is home demand and S is home supply. According
to the graph, an export subsidy of $50 results in a(n) ________ in producer surplus by the amount of ______.
a. reduction; $6,500
b. reduction; $5,000
c. increase; $5,500
d. increase; $4,000
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ANSWER: c

43. Figure: Home's Exporting Industry 1

The graph shows information about a small home exporter. D is home demand and S is home supply. According
to the graph, an export subsidy of $50 results in:
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a. a domestic consumption loss of $500.

b. a domestic production gain of $500.
c. a domestic consumption loss of $5,000.
d. a domestic production loss of $250.

ANSWER: a

44. Figure: Home's Exporting Industry 1

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The graph shows information about a small home exporter. D is home demand and S is home supply. According
to the graph, the deadweight loss from the $50 export subsidy is:
a. $500.
b. $1,000.
c. $1,500.
d. $2,500.
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ANSWER: b

45. When assessing the welfare effect of an export subsidy on a small nation, it can be shown that the subsidy:
a. increases national welfare.
b. can be paid for out of increased revenues.
c. hurts producers and helps consumers.
d. is just the same as a tariff on imports: it raises domestic price, increases domestic production, and
involves the same efficiency and consumption losses.

ANSWER: d

46. In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the
domestic supply of widgets is represented by P = 1Q. In the absence of trade, what is the equilibrium price and
quantity in Freedonia's widget market?
a. $25 and 75 units
b. $75 and 25 units
c. $25 and 25 units
d. $75 and 75 units

ANSWER: c

47. In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the
domestic supply of widgets is represented by P = 1Q. Now suppose that Freedonia engages in international
trade in widgets. The world price is $40. How many widgets will be consumed domestically, and how many
will be exported?
a. It will consume 20 domestically and export 20.
b. It will consume 20 domestically and export 40.
c. It will consume 40 domestically and export 20.
d. It will consume zero domestically and export 20.

ANSWER: a

48. In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the
domestic supply of widgets is represented by P = 1Q. Now let Freedonia's government give a $15 per unit
subsidy on each widget exported. What will be the new price and quantity consumed in the Freedonia domestic
market?
a. $20 and 60 units
b. $55 and 15 units
c. $40 and 15 units
d. $25 and 25 units
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ANSWER: b

49. In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the
domestic supply of widgets is represented by P = 1Q. Calculate the value of the deadweight losses associated
with the $15 per unit export subsidy.
a. $37.50
b. $75.00
c. $112.50
d. $150.00

ANSWER: d

50. In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the
domestic supply of widgets is represented by P = 1Q. What is the value of total subsidy payments to Freedonia's
widget exporters?
a. $825
b. $600
c. $225
d. $125

ANSWER: b

51. In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 – 3Q; the
domestic supply of widgets is represented by P = 1Q. Is the subsidy paid to Freedonia's widget exporters
considered part of the deadweight losses of the subsidy?
a. Yes; it is a payment to Freedonian exporters.
b. Yes; it is paid by Freedonian exporters that supply the domestic market.
c. No; it is a redistribution of income within the Freedonian economy.
d. No; consumers of Freedonian widget exports pay the subsidy.

ANSWER: c

52. Suppose that the world price of sugar is $100 per ton. If a small-country exporter gives its sugar exporters a
subsidy of $50 per ton, then the country will:
a. suffer deadweight production and consumption losses.
b. enjoy deadweight production and consumption gains.
c. suffer deadweight production losses.
d. suffer deadweight consumption losses.

ANSWER: a
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53. Assume that the world price of barley is $104 per ton. If a small country subsidizes exports at $25 per ton,
then that country will:
a. enjoy an increase in government revenue.
b. enjoy production and consumption gains.
c. suffer a reduction in government revenue.
d. suffer deadweight consumption losses.

ANSWER: c

54. If a large nation subsidizes its exports, it will increase its supply to the world and:
a. will prosper through increased jobs for workers and profits for its firms.
b. the world price will fall.
c. consumers in the home nation will benefit through lower prices.
d. the nation will increase its imports as well.

ANSWER: b

55. A large nation's export subsidy ____ a small trading partner's terms of trade.
a. improves
b. does not affect
c. worsens
d. strengthens its bargaining power for improving

ANSWER: a

56. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy
of $50 per ton, then the world price of sugar will:
a. fall by less than $50 per ton.
b. fall by $50 per ton.
c. remain at $100 per ton.
d. rise to $50 per ton.

ANSWER: a

57. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy
of $50 per ton, then its exporters will receive (in total):
a. $150 per ton.
b. $50 per ton.
c. more than $100 but less than $150 per ton.

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d. $100 per ton.

ANSWER: c

58. Assume that the world price of barley is $104 per ton. If a large country subsidizes exports at $25 per ton,
which of the following is a possible outcome?
a. World price decreases to $43.
b. World price decreases to $102.
c. World price increases to $119.
d. World price increases to $134.

ANSWER: b

59. Assume that the world price of barley is $104 per ton. If a large country subsidizes exports at $25 per ton,
which of the following is a possible outcome?
a. Domestic price decreases to $43.
b. Domestic price decreases to $102.
c. Domestic price increases to $119.
d. Domestic price increases to $134.

ANSWER: c

60. What happens to a large country's domestic price of widgets when it gives a subsidy of X dollars for each
unit exported?
a. The domestic price will rise by X dollars.
b. The domestic price will rise by more than X dollars.
c. The domestic price will rise by less than X dollars.
d. The domestic price will not change.

ANSWER: c

61. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy
of $50 per ton, then its domestic price of sugar will:
a. fall by $50 per ton.
b. rise by $50 per ton.
c. remain unchanged at $100 per ton.
d. rise by less than $50 per ton.

ANSWER: d

62. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy
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of $50 per ton, then domestic consumption of sugar will:
a. fall.
b. rise.
c. remain unchanged.
d. first fall, then rise.

ANSWER: a

63. Figure: Home's Exporting Industry 2

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The graph shows the effect of a subsidy on a large country. D describes home demand, and S describes home
supply. According to the figure, if the world price of the product is $100, the home demand for the product is
_____ and the exports are ______.
a. 25; 125
b. 25; 25
c. 50; 75
d. 25; 75

ANSWER: c

64. Figure: Home's Exporting Industry 2

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The graph shows the effect of a subsidy on a large country. D describes home demand, and S describes home
supply. According to the graph, if the home country provides a subsidy of $100, the large country will cause the
world price to:
a. increase by $50.
b. increase by $150.
c. decrease by $50.
d. decrease by $150.

ANSWER: c

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65. Figure: Home's Exporting Industry 2

The graph shows the effect of a subsidy on a large country. D describes home demand, and S describes home
supply. According to the graph, what happens to the nation's consumer surplus as a result of the $100 export
subsidy?
a. It increases by $2,500.
b. It decreases by –$1,875.
c. It decreases by $725.
d. It decreases by $2,500.

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ANSWER: b

66. Figure: Home's Exporting Industry 2

The graph shows the effect of a subsidy on a large country. D describes home demand, and S describes home
supply. According to the graph, what is the revenue cost for the government from the $100 export subsidy?
a. $1,250
b. $12,500
c. $150
d. $1,500
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ANSWER: b

67. Figure: Home's Exporting Industry 2

The graph shows the effect of a subsidy on a large country. D describes home demand, and S describes home
supply. According to the graph, what is the home deadweight loss due to the $100 export subsidy?
a. $12,500
b. $625
c. $1,250
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d. $5,000

ANSWER: c

68. Figure: Home's Exporting Industry 2

The graph shows the effect of a subsidy on a large country. D describes home demand, and S describes home
supply. According to the graph, which of the following will help the large country avoid the deadweight loss
from the $100 export subsidy?
a. impose a tariff

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b. impose a quota
c. provide cash to developing countries to purchase the product from the home country
d. impose trade restrictions

ANSWER: c

69. An export subsidy has a similar effect as a tariff for a small nation. What is the effect of an export subsidy
for a large nation?
a. Losses are greater for the large nation than for the small nation because of the cost of the subsidy to
the home government.
b. Losses are lower for the large nation than for the small nation.
c. It is beneficial for the large nation but not for the small nation.
d. It is beneficial for consumers but harmful for firms in the large nation.

ANSWER: a

70. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy
of $50 per ton, then there will be:
a. no change in its consumer surplus.
b. a loss in consumer surplus.
c. a gain in consumer surplus.
d. an increase in domestic consumption.

ANSWER: b

71. What is the primary difference between a subsidy in a small country and a large country?
a. The large country is the only buyer of the product in the world market.
b. The small country does not produce any of the product.
c. The large country is able to influence the world price of the product.
d. There is no difference between the large country and small country.

ANSWER: c

72. A large nation's export subsidy ________ importing countries' terms of trade; a small nation's export
subsidy _________ importing countries' terms of trade.
a. improves; worsens
b. worsens; improves
c. improves; improves
d. improves; does not affect

ANSWER: d
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73. Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy
of $50 per ton, then it will:
a. enjoy a gain in its total welfare.
b. have neither a loss nor a gain in its total welfare.
c. suffer a loss in its total welfare.
d. have an increase in its consumer surplus.

ANSWER: c

74. Is an export subsidy a good way for a large nation to help a poor nation by exporting products to it at lower
prices?
a. Yes, and it is a method recommended by the WTO.
b. It can help in some cases.
c. No; it creates inefficiency in production, and it hurts firms (especially small farmers) in importing
countries who cannot compete with subsidized imports.
d. Yes, but it can get tricky when the importers demand even more quantity at lower prices.

ANSWER: c

75. Suppose that a large country decides to reduce its agricultural export subsidies by 50%. Will the country
gain or lose?
a. The country will always gain by reducing its subsidies.
b. The country will always lose by reducing its subsidies.
c. The country will gain if the reduction in its deadweight losses exceeds its terms-of-trade gains.
d. The country will gain if its terms-of-trade gains exceed the reduction in its deadweight losses.

ANSWER: a

76. Export subsidies applied by a large country create ___________for importing countries in the rest of the
world by _________ their import prices.
a. losses; increasing
b. gains; increasing
c. gains; decreasing
d. losses; decreasing

ANSWER: c

77. Are total deadweight losses of an export subsidy of X dollars per unit different when a large nation and a
small nation implement the subsidy?
a. Yes; total deadweight losses of the subsidy are smaller under the large nation than under the small
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nation.
b. Yes; total deadweight losses of the subsidy are larger under the large nation than under the small
nation.
c. No; total deadweight losses of the subsidy are the same regardless of the size of the nation
implementing the subsidy.
d. No; there are no deadweight losses for either nation.

ANSWER: b

78. Which of the following would be most negatively affected by the elimination of export subsidies?
a. agricultural exporters in developing countries like Brazil and Thailand
b. potential exporters like India and China
c. industrialized countries like the United States
d. farmers in industrial countries who lose the subsidies

ANSWER: d

79. Food aid is a(n):

a. in-kind gift of food.
b. benefit concert to support the third world.
c. type of export subsidy.
d. type of countervailing duty.

ANSWER: a

80. Why does the WTO consider food aid to poor nations to be an “indirect subsidy”?
a. It always has to be brokered by a third party.
b. Poor nations have to pay for it in other ways.
c. It enables firms to increase exports, partially paid for by the government.
d. It only works with small farmers rather than large agribusiness.

ANSWER: c

81. Why do economists disparage food aid and export subsidies for low-income nations?
a. They really have to pay in other ways.
b. The aid and subsidies always involve middlemen who profit from the transactions.
c. The aid must be paid for by the governments of the poor nations.
d. The aid and subsidies prevent their own firms from producing the same products because they cannot
compete with foreign low prices; therefore, the most efficient producers are not sellers of the
product.
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ANSWER: d

82. Which country has been the principal supplier of food aid?
a. Canada
b. France
c. Japan
d. the United States

ANSWER: d

83. Because of the harm caused to low-income nations from subsidized exports of food, high-income nations
are looking at other ways to help. The preferred way is through:
a. free food, because this does not involve any payments.
b. cash, because cash does not distort market prices.
c. low-interest loans.
d. technical aid that helps poor nations increase their own production.

ANSWER: b

84. Which groups will benefit the most as agricultural subsidies are eliminated under the Nairobi agreement?
a. agricultural exporters in smaller nations without subsidy programs because world food prices will
rise
b. agricultural consumers all over the world because more farmers will find it profitable to produce
c. agricultural importing nations, which will be able to import more food
d. governments of rich nations, which will no longer have to pay the subsidies

ANSWER: a

85. Which groups will be harmed the most as a result of the WTO's elimination of agricultural subsidies?
a. agricultural exporters in smaller nations without subsidy programs because world food prices will
rise
b. agricultural consumers all over the world because prices will be higher
c. agricultural producers in nations that subsidize their production
d. governments of rich nations that will have to provide support to farmers who are hurt

ANSWER: c

86. Who will gain as a result of the WTO's elimination of agricultural export subsidies?
a. consumers in industrialized countries who import agricultural products
b. farmers in developing countries who currently do not receive export subsidies

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c. farmers in industrialized countries who currently receive export subsidies

d. consumers in developing countries who import agricultural products

ANSWER: b

87. Who will lose as a result of the WTO's elimination of agricultural export subsidies?
a. consumers in industrialized countries that export agricultural products
b. farmers in developing countries who currently do not receive export subsidies
c. governments of rich nations, which will have to prop up farmers who are hurt
d. farmers in industrialized countries that export agricultural products

ANSWER: d

88. Why do countries subsidize exports when they suffer net welfare losses from these subsidies?
a. Exporters receiving the subsidy engage in rent-seeking activities.
b. Exports generate positive externalities.
c. Exports provide foreign currency.
d. Exports provide jobs.

ANSWER: a

89. The U.S. Agency for International Development provides substantial food aid in the form of U.S. exports of
agricultural commodities. The complete elimination of agricultural export subsidies:
a. will allow the United States to export more supplies where they are needed around the world.
b. could potentially lead to additional risk for those living the poorest countries.
c. will have no effect on U.S. food aid to developing countries.
d. will unambiguously help consumers in the least developed countries.

ANSWER: b

90. How does a production subsidy differ from an export subsidy?

a. It is applied only to production sold within the nation.
b. It is applied to all production and imports—everything consumed in the nation.
c. It is a payment from government to all domestic production—not only to units exported.
d. It kicks in when the export subsidy runs out.

ANSWER: c

91. What is the difference between an agricultural export subsidy and an agricultural production subsidy?
a. There is no difference between an agricultural export subsidy and an agricultural production subsidy.
b. An agricultural export subsidy applies only to exports, whereas an agricultural production subsidy
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applies to domestic production sold at home and in the export market.

c. An agricultural export subsidy applies only to production sold in the home market, whereas an
agricultural production subsidy applies to production sold in the export market.
d. Both agricultural export subsidies and production subsidies apply to production sold in the home
market and in the export market.

ANSWER: b

92. The WTO/GATT provides that production subsidies be:

a. eliminated at all costs.
b. increased in low-income nations and decreased in high-income nations.
c. disregarded in making trade decisions.
d. disclosed to trading partners and reduced to a minimum.

ANSWER: d

93. In a small nation employing a production subsidy, domestic producers get a payment for every good
produced, and domestic consumers:
a. purchase the product at the world price, the same as before the subsidy.
b. pay a higher price for the product.
c. pay a reduced price for the product.
d. purchase more of the product.

ANSWER: a

94. In a small nation employing a production subsidy, if the consumers face the same price as before, the
additional production generated by the subsidy will be purchased by:
a. new domestic consumers.
b. the export sector.
c. the financial sector.
d. the government.

ANSWER: b

95. When a country provides a subsidy to a home producer, it:

a. causes the consumer surplus to decline.
b. causes the producer surplus to decline.
c. causes government cost to decline.
d. causes no change in the consumer surplus.

ANSWER: d
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96. For a small nation, a production subsidy increases exports by:

a. the same amount as an export subsidy.
b. less than with an export subsidy.
c. more than with an export subsidy.
d. undercutting the world price.

ANSWER: b

97. Because consumer decisions have not been affected, the production subsidy causes a _______ net loss
than(as) the export subsidy.
a. somewhat larger
b. significantly larger
c. smaller
d. similar

ANSWER: c

98. To help producers in a small nation, the targeting principle says to use the technique that:
a. is least costly.
b. achieves the objective most directly.
c. hurts the fewest consumers.
d. does not involve government intervention.

ANSWER: b

99. To help producers in a small nation by using the targeting principle, the nation should:
a. use a production subsidy.
b. do nothing.
c. allow the market to work on its own.
d. use export subsidies.

ANSWER: a

100. If a large nation imposes a production subsidy, the production subsidy:

a. has more impact on world prices than an export subsidy.
b. increases exports by more than the export subsidy.
c. has no measurable effect on prices or exports for a large country.
d. changes world prices by less, and increases exports by less, than an export subsidy.

ANSWER: d
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101. An export tariff is:

a. a tax applied by the country importing the product.
b. a tax applied by the country exporting the product.
c. a limitation on the quantity of exports applied by the country exporting the product.
d. a limitation on the quantity of exports applied by the country importing the product.

ANSWER: b

102. The main purpose of an export tariff is to:

a. raise revenue for the government.
b. protect domestic producers competing with the exporter.
c. increase the profits of exporters.
d. decrease the profits of exporters.

ANSWER: a

103. In a small country, an export tariff will cause exports to ___________ and domestic consumption to
________.
a. rise; fall
b. rise; rise
c. fall; rise
d. fall; fall

ANSWER: c

104. In a small country, an export tariff will cause a(n) _______ in the domestic price of the export and
_______ in the world price of the export.
a. increase; a decrease
b. decrease; a decrease
c. decrease; no change
d. increase; no change

ANSWER: c

105. Who gains from an export tariff in a small country?

a. consumers because consumer surplus increases and exporters because they can increase their prices
b. exporters because they can increase their prices
c. the government because it collects tariff revenues and consumers because consumer surplus increases
d. exporters because they can increase their prices and the government because it collects tariff

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revenues

ANSWER: c

106. In a small country, an export tariff will result in:

a. a consumption deadweight loss but no production deadweight loss.
b. a production deadweight loss but no consumption deadweight loss.
c. no production and consumption deadweight losses.
d. both production and consumption deadweight losses.

ANSWER: d

107. Assume that a small country produces and exports bananas. The world price of bananas is $1 per unit. If
the country places an export tariff of $0.50 per unit of bananas exported, this will cause:
a. an increase in the domestic price of bananas and an increase in the world price of bananas.
b. a decrease in the domestic price of bananas and a decrease in the world price of bananas.
c. no change in the domestic price of bananas and an increase in the world price of bananas.
d. a decrease in the domestic price of bananas and no change in the world price of bananas.

ANSWER: d

108. How might an export tariff in a large country improve the country's economic welfare?
a. The export tariff will always improve the country's welfare, since there are no deadweight
consumption and production losses.
b. The export tariff will improve the country's welfare if terms-of-trade gains are larger than deadweight
consumption and production losses.
c. The export tariff will never improve the country's welfare, since deadweight consumption and
production losses always outweigh terms-of-trade gains.
d. The export tariff will improve the country's welfare if deadweight consumption and production losses
are greater than terms-of-trade gains.

ANSWER: b

109. What will happen to domestic and world prices when a large country imposes an export tariff?
a. The world price will increase and the domestic price will decrease.
b. Both the world price and the domestic price will increase
c. The world price will decrease and the domestic price will increase.
d. Both the domestic price and the world price will decrease.

ANSWER: a

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110. Compare the effects on world prices for an export tariff in a small country with an export tariff in a large
country.
a. An export tariff in a small country and an export tariff in a large country both increase the world
price by the amount of the tariff.
b. An export tariff in a small country does not change the world price, while an export tariff in a large
country increases the world price.
c. An export tariff in a small country increases the world price, while an export tariff in a large country
has no effect on the world price.
d. Neither an export tariff in a small country nor an export tariff in a large country has any effect on the
world price.

ANSWER: b

111. Assume that a large country produces and exports bananas. The world price of bananas is $1 per unit. If
the country places an export tariff of $0.50 per unit of bananas exported, this will cause:
a. an increase in the domestic price of bananas that is larger than $0.50.
b. an increase in the domestic price of bananas that is smaller than $0.50.
c. a decrease in the domestic price of bananas that is smaller than $0.50.
d. a decrease in the domestic price of bananas that is larger than $0.50.

ANSWER: c

112. Assume that a large country produces and exports bananas. The world price of bananas is $1 per unit. If
the country places an export tariff of $0.50 per unit of bananas exported, this will cause:
a. an increase in the world price of bananas that is larger than $0.50.
b. an increase in the world price of bananas that is smaller than $0.50.
c. a decrease in the world price of bananas that is smaller than $0.50.
d. a decrease in the world price of bananas that is larger than $0.50.

ANSWER: b

113. What is the effect of an export tariff in a large country on the importing country?
a. The importing country loses, since it pays a higher price for the product.
b. The importing country gains, since it pays a lower price for the product.
c. The importing country neither gains nor loses, since the world price does not change.
d. The importing country will gain from the terms-of-trade effect.

ANSWER: a

114. Compare the effects on the importing country of an export subsidy with an export tariff imposed by a large
country.
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a. The importing country will gain from both an export subsidy and an export tariff imposed by a large
country.
b. The importing country will lose from both an export subsidy and an export tariff imposed by a large
country.
c. The importing country will gain from an export tariff and lose from an export subsidy imposed by a
large country.
d. The importing country will gain from an export subsidy and lose from an export tariff imposed by a
large country.

ANSWER: d

115. An export quota is:

a. a tax imposed by the exporting country on products exported.
b. a limit imposed by the exporting country on the amount that its firms are allowed to export.
c. a limit imposed by the importing country on the amount that its consumers are allowed to import.
d. a limit on exports agreed on by both the exporting and importing countries.

ANSWER: b

116. How will an export quota imposed by a small exporting country affect the world price?
a. It will cause an increase in the world price.
b. It will cause a decrease in the world price.
c. It will not affect the world price.
d. It will first cause an increase, then a decrease, in the world price.

ANSWER: c

117. How will an export quota imposed by a large exporting country affect the world price?
a. It will cause an increase in the world price.
b. It will cause a decrease in the world price.
c. It will have no effect upon the world price.
d. It will first cause an increase, then a decrease, in the world price.

ANSWER: a

118. How will an export quota imposed by a large exporting country affect the country's domestic price?
a. It will cause an increase in the domestic price.
b. It will cause a decrease in the domestic price.
c. It will have no effect upon the domestic price.
d. It will first cause an increase, then a decrease, in the domestic price.
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ANSWER: b

119. How will an export quota imposed by a large exporting country affect the total quantity sold by the
country's firms?
a. It will cause an increase in the total quantity sold by the country's firms.
b. It will cause a decrease in the total quantity sold by the country's firms.
c. It will have no effect upon the total quantity sold by the country's firms.
d. It will have an indeterminate effect on the total quantity sold by the country's firms.

ANSWER: b

120. How will an export quota imposed by a large exporting country affect the domestic price?
a. It will cause an increase in the domestic price.
b. It will cause a decrease in the domestic price.
c. It will have no effect upon the domestic price.
d. It will first cause an increase, then a decrease, in the domestic price.

ANSWER: b

121. How will an export quota imposed by a large exporting country affect the country's welfare?
a. It will cause an increase in the country's welfare if the terms-of-trade gains exceed consumption and
production deadweight losses.
b. It will always cause a decrease in the country's welfare.
c. It will always cause an increase in the country's welfare.
d. It will not change the country's welfare.

ANSWER: a

122. Are domestic consumers better or worse off after a large exporting country imposes an export quota?
a. Domestic consumers are better off, since there is a gain in consumer surplus.
b. Domestic consumers are worse off, since there is a loss of consumer surplus.
c. Domestic consumers are neither better nor worse off, since gains in consumer surplus are offset by
losses of producer surplus.
d. Domestic consumers may be better or worse off, depending on the magnitude of the terms-of-trade
gains.

ANSWER: a

123. Are domestic firms better or worse off after a large exporting country imposes an export quota?
a. Domestic firms are worse off, since there is a loss of producer surplus.
b. Domestic firms are better off, since producer surplus rises.
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c. Domestic firms are better off, since there is an increase in the rents they earn.
d. Domestic firms are neither better nor worse off, since their higher export price is offset by a lower
price in the domestic market.

ANSWER: c

124. Does the GATT allow export quotas?

a. No; Article XI bans all export quotas.
b. Yes; Article XI places no restrictions on export quotas.
c. Yes; Article XI allows export quotas on trade in military equipment.
d. Yes; Article XI allows temporary export quotas to prevent critical shortages of foodstuffs or other
products essential to the exporting country.

ANSWER: d

125. What happened to the world prices of rare earth minerals following China's imposition of export quotas of
these materials?
a. They did not change.
b. They rose dramatically, then fell, as other countries began mining for rare earth minerals.
c. They rose gradually until China stopped applying export quotas on these minerals.
d. They fell.

ANSWER: b

126. Why did China recently change its export quota policy on exports of rare earth minerals?
a. China's exports of rare earth minerals exceeded the maximum levels under the quota system.
b. It found that export tariffs were more successful than export quotas in maintaining high world prices.
c. Processing of rare earth minerals leads to low-grade radioactive waste by-products.
d. The policy proved to be of little value to China as many other countries found other sources for rare
earth minerals.

ANSWER: d

127. Which policy does the United States use to subsidize high-technology exports?
a. production subsidies
b. grants for research and development
c. export quotas
d. low-interest loans from the U.S. Export-Import Bank to consumers of high-technology exports

ANSWER: d

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128. Which policy does Europe use to subsidize the production of Airbus airplanes?
a. tax breaks
b. grants for research and development
c. export quotas
d. import quotas

ANSWER: b

129. In the United States, which of the following is a subsidy provided for Boeing?
a. free utility service to production facilities
b. tax breaks for Boeing
c. loans to Boeing's customers through the Export-Import Bank
d. loans to Boeing for production assistance

ANSWER: c

130. A “strategic” use of high-tech subsidies would involve:

a. assistance to help firms compete with other domestic firms.
b. loans or other assistance to make it possible for high-tech firms to take market share from
international competitors.
c. making sure the firm makes extra profits, so it will be strong and provide jobs.
d. enforcing anticompetition laws.

ANSWER: b

131. Which of the following is the most important reason that some countries subsidize high-tech industries
(such as wide-body airplanes)?
a. Their political influence generates rent-seeking payoffs from their governments.
b. Their governments believe that high-tech industries should receive infant industry protection.
c. Their governments believe that high-tech industries create positive externalities to other industries.
d. High-tech industrial imports are often dumped and subject to antidumping duties.

ANSWER: c

132. What is the name given to a market in which a home monopoly firm and a foreign monopoly firm are
producing very similar products (such as wide-body airplanes)?
a. duopoly
b. dual monopoly
c. dual monopolistic competitive industry
d. duopolistic competitive industry
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ANSWER: a

133. If a government subsidizes a high-tech firm, allowing it to increase sales and profits from international
operations by more than the cost of the subsidy:
a. it will be viewed as a strategic policy success.
b. we have to discount any success because of the environmental degradation that always occurs.
c. there will be a negative effect because the government should not and does not subsidize to gain an
international position for private firms.
d. there could be increased costs in the future.

ANSWER: a

134. Economists use game theory to analyze:

a. different exclusive options whose payoffs depend on the choices and actions of another entity with
the same goals.
b. how people behave with a limited set of options.
c. economic decisions by consumers when income rises.
d. the tax consequences of various investment decisions.

ANSWER: a

135. In the text, game theory is used to analyze:

a. strategic interaction between governments.
b. strategic interaction between firms.
c. typical interaction between governments.
d. strategic interaction between consumers and firms.

ANSWER: b

136. The grid that organizes the results of various decisions based on what each entity does under different
circumstances is known as the:
a. meridian grid.
b. payoff matrix.
c. choice bundles.
d. Malthusian dilemma.

ANSWER: b

137. Economist John Nash analyzed game theory and came up with a most likely outcome based on the best net
benefit to each party. Such an outcome is called the:
a. production possibilities matrix.
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b. payoff matrix.
c. foursquare decision algorithm.
d. Nash equilibrium.

ANSWER: d

138. The Nash equilibrium can be described as a:

a. best response to the other player's strategy.
b. first-mover advantage.
c. quid pro quo.
d. unilateral deviation.

ANSWER: a

139. In a two-firm industry, a Nash equilibrium occurs whenever:

a. each firm makes decisions without consideration of the other firm's actions.
b. the first firm makes decisions without consideration of the second firm's actions, whereas the second
firm does consider the first firm's actions.
c. the second firm makes decisions without consideration of the first firm's actions, whereas the first
firm does consider the second firm's actions.
d. each firm considers all possible actions by other firms and then chooses the best strategy.

ANSWER: d

140. When deciding whether it is a good idea to subsidize, we must compare the present value of the net gain in
profits with the:
a. taxes paid by the producers on those profits.
b. cost of the subsidy.
c. reduced profits in other nations.
d. timeliness of making the decision.

ANSWER: b

141. An important factor to consider when a nation considers subsidies for export promotion is whether:
a. the firms will follow through on their plans.
b. costs will rise or fall.
c. the subsidy and continued support will force foreign firms out of the market.
d. the government can afford to do it.

ANSWER: c

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142. Figure: Payoff Matrix for Airbus and Boeing

Which of the following options is a Nash equilibrium in the payoff matrix in the figure?
a. Boeing produces and Airbus does not produce.
b. Boeing does not produce and Airbus produces.
c. Boeing does not produce and Airbus does not produce.
d. Either Boeing produces and Airbus does not produce or Boeing does not produce and Airbus
produces.

ANSWER: d

143. Figure: Payoff Matrix for Airbus and Boeing

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The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in
response to action on the part of the other company. This payoff matrix describes actions in developing so-
called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the
outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based
on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to
produce superjumbo jets. Which choices (A, B, C, D) are Nash equilibria?
a. D and B
b. A and C
c. B and D
d. B and C
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ANSWER: d

144. Figure: Payoff Matrix for Airbus and Boeing

The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in
response to action on the part of the other company. This payoff matrix describes actions in developing so-
called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the
outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based
on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to
produce superjumbo jets. Boeing has decided NOT to produce superjumbo jets. Instead, it will continue to
market its 450-passenger 747s. Which elements represent this decision?
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a. A and B
b. B and C
c. C and D
d. A and D

ANSWER: c

145. Figure: Payoff Matrix for Airbus and Boeing

The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in
response to action on the part of the other company. This payoff matrix describes actions in developing so-
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called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the
outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based
on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to
produce superjumbo jets.
Boeing has decided NOT to produce superjumbo jets. Instead, it will continue to market its 450-passenger 747s.
However, Airbus will produce superjumbo jets. Which element represents both of their decisions?
a. A
b. B
c. C
d. D

ANSWER: c

146. Figure: Payoff Matrix for Airbus and Boeing

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The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in
response to action on the part of the other company. This payoff matrix describes actions in developing so-
called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the
outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based
on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to
produce superjumbo jets.
Boeing has decided NOT to produce superjumbo jets. Instead, it will continue to market its 450-passenger 747s.
However, Airbus will produce superjumbo jets. Is Boeing's decision correct?
a. Yes, because it would lose profits if it produced a superjumbo jet.
b. No, because it could earn more profits by producing a superjumbo jet.

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c. Yes, because it would neither lose nor earn more profits by producing a superjumbo jet.
d. No, because it would lose more profits if it produced a superjumbo jet.

ANSWER: a

147. In game theory, it is often uncertain what the other party will do, so there could be more than one “best”
outcome. In that case, the advantage is called:
a. risk-avoidance advantage.
b. first-mover advantage.
c. circular advantage.
d. parameter testing.

ANSWER: b

148. Figure: Payoff Matrix for Airbus and Boeing

One could use game theory to analyze government subsidies. Using the payoff matrix shown, what will each
nation do if it is a 50–50 guess what the other side will do?
a. Europe will subsidize Airbus and the United States will subsidize Boeing.
b. Europe will not subsidize Airbus and the United States will not subsidize Boeing.
c. Europe will subsidize Airbus and the United States will not subsidize Boeing.
d. Europe will not subsidize Airbus and the United States will subsidize Boeing.

ANSWER: a

149. Figure: Payoff Matrix for Airbus and Boeing

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This payoff matrix describes actions in developing so-called superjumbo jets that can carry 600 or more
passengers. In each element, the lower-left value gives the outcome for Boeing based on the action of Airbus
and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element
A, each company will lose $10 million if they both decide to produce superjumbo jets. Now suppose that the
U.S. government decides to provide a $50 million subsidy to Boeing to encourage it to produce superjumbo jets.
Boeing decides to take the subsidy. Using the payoff matrix, what is Airbus's best strategy?
a. continue to produce superjumbo jets because its profits will not be affected
b. continue to produce superjumbo jets even though its profits will fall
c. discontinue producing superjumbo jets because its losses are lower than if it produced superjumbo
jets

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d. discontinue producing superjumbo jets because it would neither lose nor earn more profits by
producing superjumbo jets

ANSWER: c

150. Figure: Payoff Matrix for Airbus and Boeing

This payoff matrix describes actions in developing so-called superjumbo jets that can carry 600 or more
passengers. In each element, the lower-left value gives the outcome for Boeing based on the action of Airbus
and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element
A, each company will lose $10 million if they both decide to produce superjumbo jets. Which element in the
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payoff matrix describes the best choices of Airbus and Boeing when Boeing receives a $50 million subsidy?
a. A
b. B
c. C
d. D

ANSWER: b

151. Figure: Payoff Matrix for Airbus and Boeing with a Subsidy

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Based on the payoff matrix, if the European Union provides Airbus with a subsidy, Airbus will ______airplanes
and Boeing will _________airplanes.
a. produce; produce
b. not produce; produce
c. produce; not produce
d. not produce; not produce

ANSWER: c

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152. Subsidization of aircraft industries in the United States and Europe has become a competitive situation and
very costly because of escalation. Therefore, in 1992:
a. the United States and the European Union agreed to merge Boeing, Airbus, and McDonnell-Douglas
and share the profits.
b. the United States and the European Union agreed to limit development subsidies on aircraft to 33%
of the total developmental costs.
c. the United States refused to budge because of its heavy defense needs.
d. Airbus needed more help because it is run by a consortium of firms in three European nations.

ANSWER: b

153. Which of the following was a result of the 1992 agreement between the United States and the European
Union to reduce subsidies to their aircraft industries?
a. lower prices for aircraft
b. increased benefits in other nations that purchase aircraft
c. cost increases for the U.S. and European governments
d. cost savings for Airbus and Boeing

ANSWER: d

154. Europe's subsidy for the _______ may have been a profitable strategic move because Boeing had not
planned to produce that type of aircraft.
a. Bell helicopter
b. Blackhawk jet
c. Lear jet
d. double-decker Airbus 380

ANSWER: d

155. The largest passenger jet ever developed is the:

a. double-decker Airbus 380.
b. Boeing 787 Dreamliner.
c. MD400 Sky ship.
d. Chinese 899 Blue Jet.

ANSWER: a

156. Do both Boeing and Airbus produce double-decker superjumbo aircraft?

a. Yes, both produce double-decker superjumbo aircraft.
b. No, neither company produces double-decker superjumbo aircraft.

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c. Boeing produces double-decker superjumbo aircraft but Airbus does not.

d. Airbus produces double-decker superjumbo aircraft but Boeing does not.

ANSWER: d

157. Because Boeing did not enter the market for superjumbo aircraft, it is:
a. possible that Airbus's profits will be large enough to offset subsidy costs.
b. unlikely that Airbus's profits will be large enough to offset subsidy costs.
c. unlikely that Boeing's profits on other aircraft will not offset subsidy costs.
d. possible that Airbus's profits on other aircraft will offset superjumbo subsidy costs.

ANSWER: a

158. In February 2019, the predictions from economic theory on export subsidies were borne out as:
a. Boeing declared bankruptcy.
b. Airbus announced it would discontinue its line of A380 in 2021.
c. Airbus competed Boeing to the brink of collapse and bought it out.
d. Airbus announced the largest purchase of A380 aircraft in its company’s history.

ANSWER: b

159. When the United States subsidizes Boeing for export, who benefits and who pays the bill?
a. Foreign consumers, Boeing workers, and Boeing stockholders benefit; U.S. taxpayers foot the bill.
b. Foreign producers benefit; foreign consumers pay the bill.
c. Domestic consumers benefit; foreign firms pay the bill.
d. There is only a deadweight loss—everyone wins in this situation.

ANSWER: a

160. What is the difference between a direct and an indirect agricultural export subsidy?

ANSWER: A direct subsidy is a payment to firms for every unit exported. Indirect subsidies increase
agricultural exports through less visible means and include actions such as food aid from developed
to poor countries, which lower agricultural prices in poor countries and lower incentives for
agricultural production.

161. Developing countries are divided over “special safeguards” for agricultural products. What are safeguards,
and why are they contentious?

ANSWER: The safeguard provision allows a country to temporarily protect a domestic agricultural activity. By
declaring products special, a country can shield them from WTO-negotiated full tariff cuts in the
interests of food or livelihood security or rural development.
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The special safeguard mechanism might also allow developing countries to raise farm tariffs
temporarily—in some cases to above their rates—to counter a sudden influx of imports or a collapse
in prices. Exporters fear that they could actually lose market access, depending on the terms, as the
new tariffs for special products are enacted by countries like India that do not currently enjoy such
protection.

Food-exporting developing countries wish to restrict the use of special safeguards; food-importing
countries with domestic production want to exempt as many products as possible. For example,
China might declare rice, cotton, and sugar special products. That would hurt rice exporters like
Thailand and cotton exporters from West Africa.

162. What was agreed upon during the 2015 Nairobi negotiations on agricultural export subsidies?

ANSWER: Developed countries agreed to immediately eliminate agricultural export subsidies, while
developing countries agreed to do so by the end of 2018. In addition, developing countries may use
the WTO's safeguard provision to raise tariffs temporarily to deal with a surge in imports or falling
prices.

163. Suppose that a large country decides to cut its agricultural export subsidies by 50%. Will the country gain
or lose?

ANSWER: The country will always gain by reducing its subsidies because it reduces its deadweight losses and
reduces losses from worsened terms of trade.

164. What is the difference between an agricultural export subsidy and an agricultural production subsidy?

ANSWER: An agricultural export subsidy applies only to exports, whereas an agricultural production subsidy
applies to production sold at home and in the export market. As a result, home prices do not change
and there is no consumption deadweight loss.

165. Explain why importing countries benefit from the export subsidies given by large nations.

ANSWER: Importing countries gain because of the lower prices of the import and through improved terms of
trade.

166. Which of the following is the most well-known system of export quotas?
a. export quotas established by the Organization of Iron Ore Exporters (OIOE)
b. export quotas established by the International Cocoa Cartel (ICC)
c. export quotas established by the International Bauxite Organization (IBO)
d. export quotas established by the Organization of Petroleum Exporting Countries (OPEC)
ANSWER: d

167. Table: Demand and Supply for Iron Ore

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Price/ton Quantity demanded (tons) Quantity supplied (tons)

$100 10 100
$90 20 90
$80 30 80
$70 40 70
$60 50 60
$50 60 50
$40 70 40
$30 80 30
$20 90 20
$10 100 10
This table represents a demand and supply schedule for a small-country producer of iron ore that sells output in
its home market and on the world market at the world price of $70 per ton. Suppose that the country's
government offers its iron ore producers an export subsidy of $10 per ton. How many tons will the country now
export?
a. 80 tons
b. 70 tons
c. 60 tons
d. 50 tons
ANSWER: d

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