Study Questions for Week 5
1. What is the “small country” assumption? What is the “large country” assumption? Is the US a
small country in the international oil market? In the international tea market? In the
international rice market? Wheat market?
2. Examine Figure 5.1. Is the text using the small country model? Explain the interpretation of
each of the areas a, b, c, and d in this figure.
3. The text notes different mechanisms for allocating import licenses under an import quota
system. Which one raises the most money for the government? Which one is the least efficient?
4. Examine Figure 5.2. With reference to Figure 5.2 explain the statement: “in a growing market
an import tariff is less restrictive than an equivalent import quota.”
5. Consider the domestic market for good X described in the figure above. Fill out the table
below for the following 2 cases.
A. $1 Import tariff for a small country. The world price is $6
World Price
$6
Domestic Price
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
Consumer Surplus (domestic)
Producer Surplus (domestic)
Production Effect
Consumption Effect
Government Tariff Revenue
Net National Gain
B. Import quota = 2 units. The world price is $6. The import licenses are auctioned to the highest
bidder.
World Price
$6
Domestic Price
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
2 units
Consumer Surplus (domestic)
Producer Surplus (domestic)
Production Effect
Consumption Effect
Government Auction Revenue
Net National Gain
C. Suppose due to increased world supply, the world price fell to $4. How would this change
your answers in 5A and 5B?
6. Consider the domestic market for good X described in the figure above. (a larger copy of this
figure is included at the end of this study guide for your convenience). Fill out the table below
for the following 2 cases.
A. $2 Import tariff for a large country. The import tariff causes the world price to fall from $6 to
$5
World Price
$5
Domestic Price
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
Consumer Surplus (domestic)
Producer Surplus (domestic)
Production Effect
Consumption Effect
Government Tariff Revenue
Net National Gain
B. 2 unit Import quota for a large country. The import quota causes the world price to fall from
$6 to $5. The import licenses are auctioned to the highest bidder.
World Price
Domestic Price
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
Consumer Surplus (domestic)
Producer Surplus (domestic)
Production Effect
Consumption Effect
Government Auction Revenue
Net National Gain
$5
2 units
9. What are domestic content requirements? Suppose Washington State had a “domestic
content” rule that WSU could only hire faculty with PhD’s from universities within Washington
State. How would this affect WSU faculty wages? Costs per student? Output (# of students
served), Quality?
10. Subsidy for domestic producers: Examine Figure 5.4, panel (a). How much does this subsidy
cost? How much does this subsidy benefit domestic producers? How much does this subsidy
cost the government? How large is the production inefficiency?
11. Subsidy for domestic exporters: Examine Figure 5.4, panel (b). Is the text using the small
country model or the large country model? How much does this subsidy cost? How much does
this subsidy benefit domestic producers? How large is the production inefficiency?
12. What is “dumping”? Compare two different definitions of dumping; the price-based and
cost-based. Suppose country A produced good X with MC=$10, ATC=$16, and AVC=$9. It
exported and sold good X to country B (a high income country) at $18. It exported and sold good
X to country C (a low income country) at $10. Can country B claim that country A is dumping
according to the price-based definition? the cost-based definition?
13. Use the case study on the sugar import quota to estimate
The loss in consumer surplus
The gain in producer surplus
The production effect
The consumption effect
How are these import quotas allocated? Should we consider the value of these import quotas
as a loss to the US?
14. The US is a large country in the world oil market. The table below shows quantities of oil (in
millions of barrels per day) for different prices. Currently the price of oil is $100 per barrel. If the
US places a $40 per barrel import tariff on oil, studies show that the world price will decrease to
$90, the US price would be $130 and the US would import 13 rather than 14 million barrels per
day. Use these data with the large country model of an import tariff to estimate the following
tariff effects.
Area a: transfer of consumer surplus from consumers to domestic producers
Area b: production inefficiency of the tariff
Area c + e: government tariff revenue
Area d: consumption inefficiency
Area e: terms of trade effect
Does the US as a whole benefit or lose from this tariff?
Price
Q supplied US
Q demanded US
Q Imported US
$100
6
20
14
$130
6
19
13
14. According to the reading on the US ethanol tariff, does the US seem to have a comparative
advantage in ethanol production? Who benefits the most from the US ethanol tariff?
15. Refer to the figure below (extras provided to show your work) showing the domestic market
for good X in the small country, Zimbania. The world price is $5.
a. Determine Zimbania’s own production, imports, quantity demanded, consumer
surplus, and producer surplus for the case of free trade.
b. Determine Zimbania’s own production, imports, quantity demanded, consumer
surplus, producer surplus, government revenue, production inefficiency and
consumption inefficiency for the case of a $2 per unit import tariff.
c. Determine Zimbania’s own production, imports, quantity demanded, consumer
surplus, producer surplus, government revenue, production inefficiency and
consumption inefficiency for the case of an import quota of 2 units.
d. Determine Zimbania’s own production, imports, quantity demanded, consumer
surplus, producer surplus, government revenue, production inefficiency and
consumption inefficiency for the case of a domestic production subsidy of $2 per unit
produced by domestic suppliers.
e. Note that all three policies (tariff, quota, and subsidy) expand domestic production to
3 units and increase producer surplus to $4.5. Which policy is the most efficient? Why?