Assignment 14
1. In 1995, a new world organization for free trade was created. Its name is
a)
b)
c)
d)
e)
World Trade Bureau (WTB).
World Bank (WB).
International Monetary Fund (IMF).
World Trade Organization (WTO).
General Agreement on Tariffs and Trade (GATT).
2. Suppose that the world price of kiwi fruit ($25 per case) is below the domestic price ($40 per
case). A tariff of $10 per case would
a) allow domestic consumers to enjoy kiwi fruit for $5 more per case than the free trade
price, but still $10 less than the domestic price.
b) cause domestic producers to be worse off by $10 per case.
c) allow domestic consumers to enjoy kiwi fruit for $10 more per case than the free trade
price, but still $5 less than the domestic price.
d) cause domestic producers to be worse off by $5 per case.
e) cause foreign producers to be better off, since the price they charge is now higher by $10
per case.
3. Refer to the figure above. If S1 is the domestic supply curve, which of the following statements
is true if $15 is the world equilibrium price and an import quota of 600 tons is imposed?
a)
b)
c)
d)
The amount actually imported after the quota would be 400 tons.
The quantity imported would be zero.
S2 would be the domestic supply curve plus the quota.
The amount imported under the quota would be the same as the amount imported if there
were free trade.
e) The amount actually imported after the quota would be 200 tons.
4. In the figure above, if the world price of wheat is $35 and a $15 tariff is imposed,
a)
b)
c)
d)
e)
domestic consumption will increase from 150 to 200 bushels of wheat.
domestic consumption will decrease from 400 to 550 bushels of wheat.
imports will be eliminated.
the government will collect $200 in revenue from the tariff.
domestic consumption will increase from 550 to 650 bushels of wheat.
5. Which of the following statements concerning free trade areas (FTAs) is not true?
a)
b)
c)
d)
e)
NAFTA became effective on January 1, 1994.
The European Union is an FTA.
An FTA agreement was negotiated by the United States, Canada, and Mexico in 1992.
The United States and Canada negotiated an FTA in 1989.
In an FTA, member countries eliminate trade barriers among themselves.
6. One important unintended consequence of the Smoot-Hawley Tariff Act was to
a)
b)
c)
d)
increase U.S. television production in the 1960s.
lessen the severity of the Great Depression by increasing exports.
increase the efficiency of domestic automobile production.
increase the severity of the Great Depression by causing other countries to retaliate,
leading to a decline in exports.
e) provide the federal government with an effective tool for exercising monetary policy.
7. The U.S. Constitution forbids
a)
b)
c)
d)
e)
both import and export tariffs.
import tariffs.
quotas.
natural monopolies in restraint of trade.
export tariffs.
8. The "creation of domestic jobs" argument for protection holds that domestic firms will produce
the goods that otherwise would have been produced abroad, thus
a)
b)
c)
d)
e)
employing foreign workers instead of domestic workers.
achieving full employment in domestic industries.
employing domestic workers instead of foreign workers.
decreasing the opportunity cost of producing the good abroad.
increasing the opportunity cost of producing the good abroad.
9. Trade diversion reduces worldwide efficiency, since
a)
b)
c)
d)
e)
consumption is diverted to the country with the lowest marginal utility.
consumption is diverted to the country with the greatest marginal utility.
shipping costs are increased as foreign trade is shifted from one location to another.
production is diverted to the country with the comparative advantage.
production is diverted from the country with the comparative advantage.
10. Refer to the figure above. If the world equilibrium price is P1 and a tariff equal to P2 – P1 is
imposed on each ton of imported corn, what is the total tariff revenue to the government?
a)
b)
c)
d)
e)
(P2 – P1) X (Q3 – Q2)
(P2 – P1) X (Q5 – Q2)
(P2 – P1) X (Q5 – Q1)
(P2 – P1) X (Q4 – Q2)
(P2 – P1) X (Q2 – Q1)
11. Employers and workers in the affected industry know the consequences of protection are
principally
a)
b)
c)
d)
e)
lower prices for their output, lower profits for owners, and lower wages for workers.
lower prices for their output, higher profits for owners, and higher wages for workers.
higher prices for their output, lower profits for owners, and higher wages for workers.
higher prices for their output, lower profits for owners, and lower wages for workers.
higher prices for their output, higher profits for owners, and higher wages for workers.
12. In 2002, President Bush imposed tariffs on foreign steel imports into the United States. Which
argument for protectionism would support such a policy?
a)
b)
c)
d)
e)
The infant industry argument
The principle of comparative advantage
National defense requirements
The creation of a "level playing field"
All of these.
13. Developing countries often justify tariffs as an important source of
a)
b)
c)
d)
e)
information regarding their foreign trade.
national pride and identity.
additional bureaucratic jobs to administer the tariffs.
government revenue.
protection for domestic industries.
14. Tariffs are frequently imposed to protect
a)
b)
c)
d)
e)
foreign producers from domestic competition.
the exchange rate from sharp fluctuations.
existing trade relationships.
domestic producers from foreign competition.
domestic consumers from imported goods.
15. The trade creation effect refers to
a)
b)
c)
d)
e)
a production shift to a higher-cost producer as a result of a preferential trade agreement.
a reduction in economic efficiency as a result of a preferential trade agreement.
diversion of production from a country that has comparative advantage.
a production shift to a country that does not have comparative advantage.
the outcome of a preferential trade agreement that allows a country to obtain goods at a
lower cost than is available at home.
16. A tariff is a tax on
a)
b)
c)
d)
e)
shipping containers.
exports only.
imports only.
domestically produced items only.
imports or exports.
17. Protection is rarely withdrawn from infant industries because such firms
a)
b)
c)
d)
e)
are necessary to ensure that important permanent national defense goals are achieved.
come to wield more political power as they grow larger.
need the protection to ensure continued domestic employment.
will go bankrupt in the long run without them.
are necessary to ensure a "level playing field."
18. Refer to the figure above. If the world price of corn is P1 and a tariff equal to P2 – P1 is
imposed on each ton of imported corn, which of the following is true?
a)
b)
c)
d)
e)
Imports will decrease by Q5 – Q4
Imports will increase by Q2 – Q1
Imports will decrease to Q4 – Q2
Imports will decrease to Q3 – Q2
Imports will decrease by Q2 – Q1
19. If average costs of production decline with increases in output, then
a)
b)
c)
d)
e)
the variable cost of production must exceed the fixed costs.
many small firms will be more efficient than a single large firm.
one large producer will be more efficient than many small ones.
product diversification is necessary to spread the overhead.
diseconomies of scale become significant as output increases.
20. Which of the following would not result from a tariff?
a)
b)
c)
d)
e)
Decreased domestic consumption
Higher prices
A greater volume of international trade
An increase in domestic production
An increase in government revenue
Essay Questions
1. How would the effects of international trade on the domestic orange market change if the world
price of oranges were above the domestic equilibrium price?
2. What is the difference between a customs union and a free trade area?