CHAPTER 7

Analysis of a Tariff

 

Multiple Choice Questions

 

1.         A _______ is a tax on importing a good or service into a country.

a.   quota

b.   tariff

c.   consumption effect

d.   one-dollar, one-vote metric

            ANSWER:       B

 

2.         Which of the following is a tax on imports that is levied as a money amount per physical unit of import?

a.   specific tariff

b.   ad valorem tariff

c.   consumption effect

d.   quota

            ANSWER:       A

 

3.         Which of the following is a tax on imports that charges a percentage of the estimated market value of a good?

a.   specific tariff

b.   ad valorem tariff

c.   consumption effect

d.   quota

            ANSWER:       B

 

4.         A(n) _______ charges a percentage of the estimated market value of a good; while a(n) _______ charges a money amount per physical unit of import.

a.   quota; ad valorem tariff

b.   ad valorem tariff; consumption effect

c.   ad valorem tariff; specific tariff

d.   specific tariff; ad valorem tariff

            ANSWER:       C


 

5.         A tariff will allow domestic producers to:

           

            (1)        expand production and sales.

            (2)        contract production and sales.

            (3)        raise prices.

            (4)        lower prices

           

a.   (1) + (2)

b.   (2) + (3)

c.   (1) + (3)

d.   (2) + (4)

            ANSWER:       C

 

Figure 7.1 illustrates the demand and supply schedules for pocket calculators in Mexico, a “small” nation that is unable to affect the world price.

Figure 7.1. Import Tariff Levied by a “Small” Country

   6.   Consider Figure 7.1. In the absence of trade, Mexico produces and consumes:

a.     10 calculators

b.     40 calculators

c.     60 calculators

d.     80 calculators

ANSWER:           C

7.     Consider Figure 7.1. In the absence of trade, Mexico’s producer surplus and consumer surplus respectively equal:

a.     $120, $240

b.     $180, $180

c.     $180, $320

d.     $240, $240

ANSWER:           B

8.     Consider Figure 7.1. With free trade, Mexico imports:

a.     40 calculators

b.     60 calculators

c.     80 calculators

d.     100 calculators

ANSWER: D

  9.   Consider Figure 7.1. With free trade, the total value of Mexico’s imports equal:

a.     $220

b.     $260

c.     $290

d.     $300

ANSWER: D

10.   Consider Figure 7.1. With free trade, Mexico’s producer surplus and consumer surplus respectively equal:

a.     $5, $605

b.     $25, $380

c.     $45, $250

d.     $85, $195

ANSWER:           A

 

11.       Which of the following shows the loss to consumers in the importing country that results from them reducing their consumption after the tariff is imposed?

a.   one-dollar, one-vote metric

b.   production effect

c.   consumption effect

d.   terms-of-trade effect

            ANSWER:       C

 

12.       Which of the following shows the welfare loss to the economy that results from consumers shifting from imports to more expensive domestic production?

a.   one-dollar, one-vote metric

b.   production effect

c.   consumption effect

d.   terms-of-trade effect

ANSWER:       B

 

13.       Which of the following states that every dollar of gain or loss is just as important as every other dollar of gain or loss, regardless of who the gainers or losers are.

a.   one-dollar, one-vote metric

b.   production effect

c.   consumption effect

d.   terms-of-trade effect

            ANSWER:       A

 

14.       Which of the following is a change in the ratio of international prices of a large country’s exports to the international price of the large country’s imports resulting from the imposition of a tariff in the country?

a.   one-dollar, one-vote metric

b.   production effect

c.   consumption effect

d.   terms-of-trade effect

            ANSWER:       D

 

15.       Which of the following refers to the situation where buyer(s) have the ability to affect the market price?

a.   one-dollar, one-vote metric

b.   consumption effect

c.   terms-of-trade effect

d.   monopsony power

            ANSWER:       D

 

16.       Which of the following refers to the percentage by which a nation’s trade barriers raises an industry’s value added per unit of output?

a.   one-dollar, one-vote metric

b.   effective rate of protection

c.   terms-of-trade effect

d.   monopsony power

            ANSWER:       B

 

17.       Given the following information about lamp production in Klokionia, what is the effective rate of protection afforded to the Klokionian lamp industry by a 20% tariff on lamps?

                       

            With free trade:

                        Unit value (price) of a lamp = $175.00

                        Unit cost of lamp inputs = $100.00

            With 20% tariff on lamps:

                        Unit value (price) of a lamp = $210.00

                        Unit cost of lamp inputs = $100.00

 

a.   20%

b.   46.67%

c.   100%

d.   102.67%

            ANSWER:       B

 

18.       Given the following information about lamp production in Klokionia, what is the effective rate of protection afforded to the Klokionian lamp industry by a 12% tariff on lamps and a 5% tariff on imported lamp inputs?

 

            With free trade:

                        Unit value (price) of a lamp = $175.00

                        Unit cost of lamp inputs=$100.00

 

a.   7%

b.   20%

c.   21.67%

d.   28%

            ANSWER:       C

 

19.       Which of the following statements about the effective rate of protection is accurate?

 

(1)        The effective rate of tariff protection will be greater than the nominal rate when the industry’s output is protected by a higher duty than the tariff duties on its input.

(2)        If the tariff rate on the inputs to production are the same as the tariff rate on the output, then the effective rate of protection will be the same as the nominal rate charged on the output.

(3)        The effective rate of protection cannot be less than 0.

 

a.   (1)

b.   (1) + (2)

c.   (1) + (3)

d.   (2) + (3)

            ANSWER:       B

20.       Which of the following creates the largest net gain for the country that imposes it?

a.   specific tariff

b.   ad valorem tariff

c.   nationally optimal tariff

d.   effective rate of tariff protection

            ANSWER:       C

 

21.       Which of the following statements is accurate?

 

            (1)        Tariffs are likely to decrease world economic well-being.

(2)        A tariff helps producers and hurts consumers in the country imposing the tariff.

(3)        A tariff always decreases economic domestic well-being if imposed in a small country and may increase, decrease, or leave unchanged the economic well-being if imposed in a large country.

 

a.   (1) + (2)

b.   (2) + (3)

c.   (1) + (3)

d.   (1) + (2) + (3)

ANSWER:       D      

 

Fill-in-the-Blank Questions

 

 

22.       Klokionia is a small country. Figure 7.2 illustrates the transition from autarky to free trade in the Klokionian lamp market. Answer the following questions based on Figure 7.2.

a.         In autarky, Klokionian producers produced _______ thousand lamps.

b.         In autarky, Klokionian consumers consumed _______ thousand lamps.

c.         In autarky, the price of lamps in Klokionia was $_______.

d.         In autarky, consumer surplus in the Klokionian lamp market was $_______ thousand.

e.         In autarky, producer surplus in the Klokionian lamp market was $_______ thousand.

f.          With free trade, Klokionian producers produced _______ thousand lamps.

g.         With free trade, Klokionian consumers consumed _______ thousand lamps.

h.         With free trade, Klokionia imports _______ thousand lamps.

i.          With free trade, domestically produced Klokionian lamps cost $_______.

j.          With free trade, imported Klokionian lamps cost $_______.

k.         With free trade, producer surplus in the Klokionian lamp market is $_______ thousand.

l.          With free trade, consumer surplus in the Klokionian lamp market is $_______ thousand.

m.        With free trade, foreign producers earn revenue of $_______ thousand in the Klokionian lamp market.

 

            ANSWERS:     a.         170

b.                  170

c.                   287.50

d.                  18,062.5

e.                   18.062.5

f.                    100

g.                   240

h.                   140

i.                     200

j.                    200

k.                  6,250

l.                     36,000

m.                 28,000

 

 

 

 

 

23.       Lamp producers in Klokionia, a small country, lobby successfully for a tariff. Answer the following questions based on Figure 7.3.

a.         With free trade, Klokionian producers produced ______ thousand lamps.

b.         With free trade, Klokionian consumers consumed _______ thousand lamps.

            c.         With free trade, Klokionia imported _______ thousand lamps.

d.         After the tariff is imposed, Klokionian producers produce _______ thousand lamps.

e.         After the tariff is imposed, Klokionian consumers consume _______ thousand lamps.

f.          After the tariff is imposed, Klokionia imports _______ thousand lamps.

g.         After the tariff is imposed, lamps produced in Klokionia cost $_______.

h.         After the tariff is imposed, imported lamps cost $_______ in Klokionia.

            i.          The size of the tariff is $_______.

j.          The imposition of the tariff in the Klokionian lamp market results in a $_______ thousand increase in producer surplus.

k.         The imposition of the tariff in the Klokionian lamp market results in a $_______ thousand decrease in consumer surplus.

            l.          The consumption effect of the tariff is $_______ thousand.

            m.        The production effect of the tariff is $_______ thousand.

            n.         Government revenue from the tariff is $_______ thousand..

o.         After the tariff is imposed, Klokionia imports _______ thousand lamps.

p.         The net effect of the tariff on economic welfare is $_______ thousand.

           

ANSWERS:     a.         100

b.                  240

c.                   140

d.                  140

e.                   200

f.                    60

g.                   250

h.                   250

i.                     50

j.                    6,000

k.                  11,000

l.                     1,000

m.                 1,000

n.                   3,000

o.                  60

p.                  -2,000

 

 

 

 

24.       Drewconia is a large country. Lamp producers in Drewconia lobby successfully for the imposition of an import tariff. Answer the following questions about Figure 7.4.

a.         With free trade, lamp producers in Drewconia produced _______ thousand lamps.

b.         With free trade, consumers in Drewconia consumed _______ thousand lamps.

            c.         With free trade, Drewconia imported _______ thousand lamps.

d.         What area represents the change in consumer surplus that results from the imposition of the tariff on lamp imports? _______

e.         What area represents the change in producer surplus that results from the imposition of the tariff on lamp imports? _______

f.          After the tariff is imposed, Drewconian consumers buy _______ thousand lamps.

g.         After the tariff is imposed, Drewconian lamp producers sell _______ thousand lamps.

h.         After the tariff is imposed, Drewconia imports _______ thousand lamps.

            i.          What area represents the consumption effect of the tariff? _______

            j.          What area represents the production effect of the tariff? _______

            k.         What area represents the terms-of-trade effect? _______

            l.          What area represents government revenue from the tariff? _______

m.        What is the net effect of the tariff on economic welfare in Drewconia? _______

           

ANSWER:       a.         100

b.                  200

c.                   100

d.                  m + o + q + s

e.                   m

f.                    190

g.                   110

h.                   80

i.                     s

j.                    o

k.                  r

l.                     q + r

m.                 r – (o + s)        

True/False Questions

 

25.       An ad valorem tariff charges a percentage of the estimated market value of a good.

            ANSWER:       True

 

26.       A specific tariff charges a percentage of the estimated market value of a good.

            ANSWER:       False

 

27.       When a tariff is imposed, it is expected that domestic producers will raise their price to the same level as the price of the imported product after the tariff is imposed.

            ANSWER:       True

 

28.       The consumption effect shows the welfare loss to the economy that results from consumers shifting from imports to more expensive domestic production.

            ANSWER:       False

 

29.       The one-dollar, one-vote metric says that every dollar gain is more important than every dollar of loss, regardless of who the gainers or losers are.

            ANSWER:       False

 

30.       Monopsony power is a change in the ratio of international prices of a large country’s exports to the international price of the large country’s imports resulting from the imposition of a tariff in the country.

            ANSWER:       False

 

31.       The effective rate of protection is the percentage by which a nation’s trade barriers raise an industry’s value added per unit of output.

            ANSWER:       True

 

32.       A nationally optimal tariff is a tariff that creates the largest net gain for the country imposing it.

            ANSWER:       True

 

33.       It is possible for a large country to be better off, worse off, or no better off/no worse off as a result of a tariff being imposed.

            ANSWER:       True

 

34.       The consumption effect and production effect are always the same size.

            ANSWER:       False

 

35.       For a small country, the consumption effect plus the production effect represent the loss in economic welfare that results from the imposition of the tariff.

            ANSWER:       True

 

36.       For a large country, change in economic welfare in the country is equal to the consumption and production effect minus the terms-of-trade effect.

            ANSWER:       False