CHAPTER 5

NONTARIFF TRADE BARRIERS

MULTIPLE-CHOICE QUESTIONS

1. The imposition of a tariff on imported steel for the home country results in:
a. Improving terms of trade and rising volume of trade
b. Higher steel prices and falling steel consumption
c. Lower profits for domestic steel companies
d. Higher unemployment for domestic steel workers

2. Which of the following refers to a market-sharing pact negotiated by trading partners to

moderate the intensity of international competition?
a. Orderly marketing agreement
b. Local content requirements
c. Import quota
d. Trigger price mechanism

3. Suppose the United States and Japan enter into a voluntary export agreement in which Japan
imposes an export quota on its automakers. The largest share of the export quota’s “revenue
effect” would tend to be captured by:
a. The U.S. government
b. Japanese automakers
c. American auto consumers
d. American autoworkers

4. Suppose the government grants a subsidy to domestic producers of an import-competing

good. The subsidy tends to result in deadweight losses for the domestic economy in the
form of the:
a. Consumption effect
b. Redistribution effect
c. Revenue effect
d. Protective effect

5. Tariffs and quotas on imports tend to involve larger sacrifices in national welfare than would
occur under domestic subsidies. This is because, unlike domestic subsidies, import tariffs
and quotas:
a. Permit less efficient home production
b. Distort choices for domestic consumers
c. Result in higher tax rates for domestic residents
d. Redistribute revenue from domestic producers to consumers
 6. Suppose the government grants a subsidy to its export firms that permits them to charge
lower prices on goods sold abroad. The export revenue of these firms would rise if the
foreign demand is:
a. Elastic in response to the price reduction
b. Inelastic in response to the price reduction
c. Unit elastic in response to the price reduction
d. None of the above

7. Because export subsidies tend to result in domestic exporters charging lower prices on their
goods sold overseas, the home country’s:
a. Export revenues will decrease
b. Export revenues will rise
c. Terms of trade will worsen
d. Terms of trade will improve

8. Which trade restriction stipulates the percentage of a product’s total value that must be
produced domestically in order for that product to be sold domestically?
a. Import quota
b. Orderly marketing agreement
c. Local content requirement
d. Government procurement policy

9. The imposition of a domestic content requirement by the United States would cause con-
sumer surplus for Americans to:
a. Rise
b. Fall
c. Remain unchanged
d. None of the above

10. Domestic content legislation applied to autos would tend to:

a. Support wage levels of American autoworkers
b. Lower auto prices for American autoworkers
c. Encourage American automakers to locate production overseas
d. Increase profits of American auto companies

11. Compared to an import quota, an equivalent tariff may provide a less certain amount of
protection for home producers since:
a. A tariff has no deadweight loss in terms of production and consumption
b. Foreign firms may absorb the tariff by offering exports at lower prices
c. Tariffs are effective only if home demand is perfectly elastic
d. Quotas do not result in increases in the price of the imported good

12. Empirical studies show that because voluntary export quotas are typically administered by
exporting countries, foreign exporters tend to:
a. Raise their export prices, thus capturing much of the quota’s revenue effect
b. Lower their export prices, thus losing much of the quota’s revenue effect
c. Raise their export prices, thus selling more goods overseas
d. Lower their export prices, thus selling fewer goods overseas
13. Concerning the restrictive impact of an import quota, assume there occurs an increase in the
domestic demand for the import product. As long as the quota falls short of what would be
imported under free market conditions, the economy’s adjustment to the increase in demand
would take the form of a(n):
a. Decrease in domestic production of the import good
b. Increase in the amount of the good being imported
c. Increase in the domestic price of the import good
d. Decrease in domestic consumption of the import good

14. Assume the U.S. has a competitive advantage in producing calculators, while the rest of the
world has a competitive advantage in steel. Suppose the U.S. and the rest of the world enter
into an agreement to lower import quotas below existing levels on calculators and steel.
Which of the following would least likely occur for the U.S.? Rising levels of:
a. Consumer surplus for American buyers of steel
b. Producer surplus for American steelmakers
c. Production in the American calculator industry
d. Producer surplus for American calculator producers

15. A firm that faces problems of falling sales and excess productive capacity might resort to
international dumping if it:
a. Can charge higher prices in markets that are elastic to price changes
b. Earns revenues on foreign sales that at least cover variable costs
c. Can sell at that price where domestic and foreign demand elasticities equate
d. Is able to force foreign prices below marginal production costs

16. A producer successfully practicing international dumping would charge:

a. A relatively higher price in the more inelastic market
b. A relatively higher price in the more elastic market
c. The same price in all markets, regardless of their elasticities
d. Different prices in all markets, regardless of their elasticities

17. The practice of Canadian firms dumping their products in Sweden poses a problem for
economic policymakers since dumping tends to:
a. Favor Swedish consumers over Canadian consumers
b. Favor Swedish producers over Canadian producers
c. Become widespread as firms operate at full productive capacity
d. Result in firms charging prices above the total costs of production

18. The United Auto Workers union attempted to win the approval of legislation that would
moderate the practice of foreign sourcing on the part of American auto manufacturers.
Which of the following best represents this legislation?
a. Voluntary export quotas
b. Trigger price mechanism
c. Tariff quotas
d. Local content laws
19. A main factor behind the president’s decision to extend relief to steel firms in the form of
trigger prices was that:
a. Dumping complaints can be time consuming and expensive to implement
b. The Tokyo Round outlawed the granting of subsidies to steel firms
c. Trigger prices involve zero deadweight welfare loss for the economy
d. Orderly marketing agreements were too costly to administer

20. If a tariff and an import quota lead to equivalent increases in the domestic price of steel,
then:
a. The quota results in efficiency reductions but the tariff does not
b. The tariff results in efficiency reductions but the quota does not
c. They have different impacts on how much is produced and consumed
d. They have different impacts on how income is distributed

21. If a tariff and an import quota lead to equivalent increases in the domestic price of steel,
then:
a. The quota results in efficiency reductions but the tariff does not
b. The tariff results in efficiency reductions but the quota does not
c. They have identical impacts on how much is produced and consumed
d. They have identical impacts on how income is distributed

22. From the perspective of the American public as a whole, export subsidies levied by overseas
governments on goods sold to the United States:
a. Help more than they hurt
b. Hurt more than they help
c. Are equivalent to an import quota
d. Are equivalent to an export quota

23. Export subsidies levied by foreign governments on products in which the United States has
a comparative disadvantage:
a. Lower the welfare of all Americans
b. Lead to increases in U.S. consumer surplus
c. Encourage U.S. production of competing goods
d. Encourage U.S. workers to demand higher wages

24. If import licenses are auctioned off to domestic importers in a competitive market, their
scarcity value (revenue effect) accrues to:
a. Foreign corporations
b. Foreign workers
c. Domestic corporations
d. The domestic government

25. A specification of a maximum amount of a foreign produced good that will be allowed to
enter the country over a given time period is referred to as a(n):
a. Domestic subsidy
b. Export subsidy
c. Import quota
d. Export quota
26. Import quotas tend to lead to all of the following except:
a. Domestic producers of the imported good being harmed
b. Domestic consumers of the imported good being harmed
c. Prices increasing in the importing country
d. Prices falling in the exporting country

27. To maintain that South Koreans are dumping their VCRs in the United States is to maintain
that:
a. Koreans are selling VCRs in the United States below their production cost
b. Koreans are selling VCRs in the United States above their production cost
c. The cost of manufacturing VCRs in Korea is lower in Korea than in the United States
since wages are lower in Korea
d. The cost of manufacturing VCRs in Korea is higher in Korea than in the United States
since wages are higher in Korea

28. If the home country’s government grants a subsidy on a domestically produced good, domes-
tic producers tend to:
a. Capture the entire subsidy in the form of higher profits
b. Increase their level of production
c. Reduce wages paid to domestic workers
d. Consider the subsidy as an increase in production cost

29. For years the U.S. government levied quotas on inexpensive oil imported from the Middle
East. The quotas led to cost increases for U.S. consumers totaling $3 billion for oil products.
An apparent justification for this policy was that:
a. U.S. oil companies and workers deserved higher incomes
b. U.S. oil was of superior quality and merited higher prices
c. One should not be too dependent on foreign suppliers of crucial resources
d. The U.S. government needed the quota revenue to balance its budget

30. In certain industries, Japanese employers do not lay off workers. Therefore, they sometimes
have excess supplies of goods that they cannot sell on the home market without lowering
prices. To hold down losses, they sell goods in overseas markets at prices well beneath those
in Japan. This practice is best referred to as:
a. Orderly marketing
b. Trigger pricing
c. Domestic content pricing
d. Dumping

Figure 5.1 illustrates the steel market for Mexico, assumed to be a “small” country that is unable
to affect the world price. Suppose the world price of steel is given and constant at $200 per ton.
Now suppose the Mexican steel industry is able to obtain trade protection, as discussed in the
questions below. Answer Questions 31–42 on the basis of this information.
 Figure 5.1. Alternative Nontariff Trade Barriers Levied by a “Small” Country

31. Consider Figure 5.1. With free trade, the quantity of steel imported by Mexico equals:
a. 2 tons
b. 4 tons
c. 6 tons
d. 8 tons

32. Consider Figure 5.1. With free trade, Mexico’s consumer surplus and producer surplus
respectively equal:
a. $2,000 and $1,200
b. $3,200 and $200
c. $3,600 and $800
d. $4,000 and $600

33. Refer to Figure 5.1. Suppose the Mexican government imposes an import quota equal to
2 tons of steel. If Mexican steel importers behave as monopoly buyers and foreign exporters
behave as competitive sellers, the overall welfare loss of the quota to Mexico equals:
a. $200
b. $400
c. $600
d. $800
34. Refer to Figure 5.1. Again consider the steel import quota of Question #33. If foreign
exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers,
the overall welfare loss of the quota to Mexico equals:
a. $200
b. $400
c. $600
d. $800

35. Refer to Figure 5.1. Again consider the steel import quota of Question #33. If the Mexican
government auctions import licenses to the highest foreign bidder, the overall welfare loss
of the quota to Mexico equals:
a. $200
b. $400
c. $600
d. $800

36. Consider Figure 5.1. Suppose instead that the Mexican government provides a subsidy of
$200 per ton to its steel producers, as indicated by the supply schedule S M (with subsidy). The
quantity of imports equals:
a. 1 ton
b. 2 tons
c. 3 tons
d. 4 tons

37. Consider Figure 5.1. Referring to Question #36, what is the total cost of the subsidy to the
Mexican government?
a. $200
b. $400
c. $600
d. $800

38. Consider Figure 5.1. As a result of the subsidy referred to in Question #36, Mexican steel
producers gain ________ of producer surplus.
a. $200
b. $400
c. $600
d. $800

39. Consider Figure 5.1. As a result of the subsidy referred to in Question #36, the welfare loss
to Mexico due to inefficient domestic production equals:
a. $200
b. $400
c. $600
d. $800

40. Consider Figure 5.1. As the result of the subsidy referred to in Question #36, the overall
deadweight welfare loss to Mexico equals:
a. $200
b. $400
c. $600
d. $800
41. Consider Figure 5.1. Suppose instead that the rest of the world voluntarily agrees to reduce
steel shipments to Mexico vis-à-vis an export quota equal to 2 tons. Assuming Mexican
importers behave as competitive buyers while foreign exporters behave as monopoly sellers,
the overall welfare loss of the quota to Mexico is:
a. $200
b. $400
c. $600
d. $800

42. Consider Figure 5.1. Referring to the export quota of Question #41, suppose Mexican
importers behave as monopoly buyers while foreign exporters behave as competitive sellers.
The overall welfare loss of the quota to Mexico is:
a. $200
b. $400
c. $600
d. $800

Figure 5.2 illustrates the revenue and cost conditions of ABC Inc. which sells calculators in
Canada and France. On the basis of this information, answer Questions 43–46.

Figure 5.2. International Dumping

43. Consider Figure 5.2. In the absence of international dumping, ABC Inc. maximizes profits
by selling ________ calculators at a price of $________; the firm realizes profits totaling
$________.
a. 27, $5, $54
b. 27, $5, $36
c. 24, $4, $46
d. 24, $4, $28

44. Refer to Figure 5.2 and consider the quantity of calculators sold in Question #43. Of this
quantity, ABC Inc. sells ________ calculators in Canada and realizes revenues totaling
$________; the firm sells ________ calculators in France and realizes revenues totaling
$________.
a. 15, $35, 9, $45
b. 15, $45, 9, $35
c. 21, $105, 6, $30
d. 21, $30, 6, $105
45. Consider Figure 5.2. With international dumping, ABC Inc. sells ________ calculators to
Canadian buyers at a price of $________ and ________ calculators to French buyers at a
price of $________.
a. 15, $4, 12, $7
b. 15, $7, 12, $4
c. 9, $5, 15, $6
d. 9, $6, 15, $5

46. Consider Figure 5.2. Compared with the total revenue and total profit that ABC Inc. realizes
in the absence of dumping, with dumping the firm attains a:
a. Fall in revenue of $18; fall in profits of $15
b. Fall in revenue of $18, fall in profits of $18
c. Rise in revenue of $18, rise in profits of $15
d. Rise in revenue of $18, rise in profits of $18

Figure 5.3 illustrates the apple market for Sweden, assumed to be a “small” country that is unable
to affect the world price. SSweden is the domestic supply and DSweden is the domestic demand.
SSweden+Quota is Sweden’s supply schedule with an import quota. On the basis of this information,
answer Questions 47–57.

Figure 5.3. Sweden’s Apple Market

47. Consider Figure 5.3. In the absence of trade, Sweden’s equilibrium price and quantity of
apples would be:
a. $0.60 and 22 pounds
b. $0.60 and 14 pounds
c. $1.00 and 18 pounds
d. $1.40 and 14 pounds
48. Consider Figure 5.3. Suppose the rest of the world can supply apples to Sweden at a price of
$0.60 per pound. With free trade, Sweden produces ________ pounds of apples and imports
________ pounds of apples.
a. 10, 8
b. 10, 18
c. 6, 22
d. 6, 16

49. Consider Figure 5.3. At the free-trade price of $0.60 per pound, Sweden’s consumer surplus
totals $________ and producer surplus totals $________.
a. $10.80, $2.40
b. $14.60, $3.90
c. $24.20, $1.80
d. $32.40, $2.30

50. Consider Figure 5.3. If SSweden+Quota represents the supply schedule after a quota is levied,
Sweden’s imports will equal:
a. 6 apples
b. 8 apples
c. 10 apples
d. 12 apples

51. Consider Figure 5.3. After the quota is levied, the price of apples in Sweden will equal:
a. $0.60 per pound
b. $1.00 per pound
c. $1.40 per pound
d. $1.80 per pound

52. Consider Figure 5.3. As a result of the quota, Sweden’s consumer surplus:
a. Increases by $6
b. Increases by $8
c. Decreases by $6
d. Decreases by $8

53. Consider Figure 5.3. The quota leads to a deadweight welfare loss for Sweden of an amount
equaling:
a. $0.80
b. $1.60
c. $2.40
d. $3.20

54. Consider Figure 5.3. The quota’s revenue effect equals:

a. $1.60
b. $2.40
c. $3.20
d. $4.00
55. Consider Figure 5.3. Assume that Swedish import companies behave as competitive buyers
while foreign export companies behave as a monopoly seller. Compared to free trade, Sweden’s
import quota results in domestic welfare:
a. Gains totaling $3.20
b. Gains totaling $4.80
c. Losses totaling $3.20
d. Losses totaling $4.80

56. Consider Figure 5.3. Assume that Swedish import companies behave as a monopoly buyer
while foreign export companies behave as competitive sellers. Compared to free trade, Sweden’s
import quota results in domestic welfare:
a. Gains totaling $1.60
b. Gains totaling $3.20
c. Losses totaling $1.60
d. Losses totaling $3.20

57. Consider Figure 5.3. If the Swedish government auctions import licenses to the highest
bidder in a competitive market, it could realize revenues of up to:
a. $3.20
b. $4.00
c. $4.80
d. $5.60

Figure 5.4 illustrates the calculator market for Venezuela, assumed to be a “small” country that is
unable to affect the world price. S Venezuela is the domestic supply schedule and D Venezuela is the
domestic demand schedule. On the basis of this information, answer Questions 58–62.

Figure 5.4. Venezuelan Calculator Market

58. Consider Figure 5.4. Suppose the rest of the world supplies calculators to Venezuela at a
price of $4 each. With free trade, Venezuelan imports total:
a. 8 calculators
b. 16 calculators
c. 20 calculators
d. 24 calculators

59. Consider Figure 5.4. Assume the Venezuelan government grants its manufacturers a produc-
tion subsidy of $4 per calculator. After the subsidy is granted, Venezuelan imports total:
a. 8 calculators
b. 12 calculators
c. 16 calculators
d. 20 calculators

60. Consider Figure 5.4. The cost of the production subsidy to the Venezuelan government
totals:
a. $32
b. $40
c. $48
d. $54

61. Consider Figure 5.4. The increase in Venezuelan producer surplus under the production
subsidy totals:
a. $16
b. $20
c. $24
d. $32

62. Consider Figure 5.4. The production subsidy results in an overall welfare loss for Venezuela
totaling:
a. $8
b. $12
c. $16
d. $20

63. A voluntary export agreement:

a. Typically applies only to the world’s most important exporting nation(s)
b. Typically applies only to the world’s least important exporting nation(s)
c. Is always more restrictive on trade than a tariff or import quota
d. All of the above

64. When voluntary export limits are imposed on the world’s chief exporter:
a. The exports of the nonrestrained suppliers may be stimulated
b. A trade diversion effect may occur
c. Both a and b
d. None of the above
65. Subsidies to domestic firms may lead to:
a. An increase in prices
b. Higher volume of exports
c. Higher volume of imports
d. Increase in welfare of the trading partner

66. Concerning international dumping, many economists argue that “fair value” should be based
on:
a. Average variable cost
b. Average fixed cost
c. Marginal cost
d. Total cost

TRUE-FALSE QUESTIONS

T F 1. In the post–World War II era, nontariff trade barriers have decreased in

importance relative to tariff barriers.

T F 2. An import quota is a physical restriction on the quantity of goods that may be

imported during a specified time period.

T F 3. Today most industrial countries protect their industries via global import quotas
rather than selective import quotas.

T F 4. A global import quota permits a specified number of goods to be imported each

year, but does not specify where the product is shipped from and who is per-
mitted to import.

T F 5. Import tariffs and import quotas yield identical protection effects, consumption
effects, redistribution effects, and revenue effects.

T F 6. Import quotas can yield revenue for the domestic government if it auctions import
licenses to the highest bidder in a competitive market.

T F 7. To the extent that domestic importing companies organize as a monopoly buyer,

and foreign exporting companies behave as competitive sellers, the importing
companies capture the revenue effect of a quota.

T F 8. An import quota tends to reduce the overall welfare of the importing nation by an
amount equal to the protective effect, consumption effect, and the portion of the
revenue effect that is captured by the domestic government.

T F 9. The sugar import quotas of the U.S. government have tended to increase the
market price of sugar, thus reducing the costs to the government of maintaining
sugar price supports for domestic growers.

T F 10. During periods of growing demand, a tariff more effectively restricts the volume
of imports than an equivalent import quota.
T F 11. With a quota placed on imported sugar, increased domestic demand leads to
increased sugar imports but not to higher sugar prices.

T F 12. With a tariff on auto imports, increased domestic demand leads to a fall in the num-
ber of autos imported and a rise in the number of autos produced domestically.

T F 13. An orderly marketing agreement is a market-sharing pact negotiated by trading

nations, and its effect is to moderate the intensity of international competition.

T F 14. An elimination of nontariff barriers on apples tends to increase apple imports,

reduce profits of import-competing apple producers, and generate job losses for
domestic apple workers.

T F 15. The distribution of an import quota’s revenue effect depends on the relative con-
centration of bargaining power between foreign exporters and domestic importers.

T F 16. Voluntary export restraint agreements typically apply to all of the world’s export-
ing nations rather than only the most important exporting nations.

T F 17. For an export quota applied to manufactured goods, foreign exporters tend to
capture only a negligible share of the quota’s revenue effect.

T F 18. When increases in nonrestraint supply offset part of the cutback in shipments that
occur under an export quota, the overall inefficiency loss for the importing coun-
try is less than that which would have occurred in the absence of nonrestrained
exports.

T F 19. Export quotas, placed on Japanese auto shipments to the United States in the
1980s, led to rising prices of both Japanese autos and U.S.-produced autos pur-
chased by the U.S. consumer.

T F 20. Under the Multifiber Arrangement, the United States can export only limited
quantities of textiles and apparel to Taiwan, Hong Kong, South Korea, and
China.

T F 21. During the 1980s, U.S. steel-using companies (Caterpillar) actively supported the
U.S. government’s negotiation of voluntary export agreements with foreign steel-
exporting countries.

T F 22. By limiting the amount of foreign sourcing, local content laws are viewed as a
means of jobs preservation for domestic workers.

T F 23. Local content laws stipulate the maximum percentage of a product’s total value
that must be produced domestically for that product to be sold domestically.

T F 24. Local content laws are consistent with the principle of import substitution, in
which domestic production replaces the importation of goods from abroad.

T F 25. To the extent that a local content requirement forces firms to locate production in
a high-cost nation, product price rises and consumer surplus falls.
T F 26. A subsidy granted to import-competing producers results in a welfare loss to the
economy by an amount equal to the protective effect plus the consumption effect.

T F 27. A subsidy granted to import-competing producers is intended to lead to increased

domestic production and decreased imports for the home country.

T F 28. A subsidy granted to an import-competing producer shifts its supply schedule

outward to the right.

T F 29. A subsidy granted to an import-competing producer imposes a deadweight loss

on the domestic economy equal to the redistribution effect plus consumption
effect.

T F 30. A subsidy granted to import-competing producers reduces overall domestic

welfare by the same amount as would a tariff or quota that restricts imports by
the same amount.

T F 31. To the extent that subsidies granted to exporting firms reduce the foreign price of
their goods, the subsidizing country’s terms of trade worsen.

T F 32. If the U.S. demand for Korean steel is price elastic, an export subsidy granted to
Korean steel firms will increase Korea’s export revenue.

T F 33. International dumping occurs when foreign buyers are charged higher prices than
domestic buyers for an identical product, after allowing for transportation costs
and tariff duties.

T F 34. Sporadic (distress) dumping would occur if domestic orange producers dispose of
an excess quantity of oranges, resulting from an abnormally large harvest, by
selling them at lower prices abroad than at home.

T F 35. Predatory dumping would occur if Toyota Inc. of Japan sells autos to U.S.
consumers at lower prices than to Japanese consumers in order to put Chrysler
Inc. out of business.

T F 36. A firm would increase profits from dumping if it charges a lower price at home,
where demand is inelastic, and a higher price abroad where demand is elastic.

T F 37. The purpose of international dumping is to decrease a firm’s costs and increase
its profits, compared to what would be realized in the absence of dumping.

T F 38. A firm granting lifetime employment to its workers has the incentive to engage in
international dumping during periods of business recession and excess produc-
tion capacity.

T F 39. A firm suffering idle plant capacity would minimize losses by selling its product
abroad at a lower price than at home, provided that the foreign price more than
covers average variable cost.
T F 40. Under U.S. antidumping law, an antidumping duty can be levied when the U.S.
Commerce Department determines that a foreign product is being sold in the
United States at less than fair value and the U.S. International Trade Commission
determines that the dumped product is causing economic harm to domestic
producers.

T F 41. The margin of dumping equals the amount by which the foreign price is greater
than the domestic price, or the amount by which the foreign price exceeds the
cost of production.

T F 42. For most nations, the ratio of imports to total purchases in the public sector is
much higher than in the private sector.

T F 43. According to the U.S. Buy American Act, federal government agencies cannot
purchase materials and products from U.S. suppliers if their prices are higher
than those of foreign competitors.

T F 44. For the United States, the Buy American Act has tended to increase consumer
surplus for U.S. buyers of protected merchandise.

T F 45. An effective Buy American law would tend to increase U.S. producer surplus at
the expense of U.S. consumer surplus.

T F 46. An effective Buy American law results in deadweight welfare losses for the
United States in the form of the protective effect and consumption effect.

T F 47. Although the Tokyo Round of international trade negotiations reduced the Buy-
American restrictions of the U.S. government, many state governments have
maintained restrictive Buy-American policies.

T F 48. According to the cost-based definition of dumping, dumping begins to occur

when a firm sells a product at a price that is less than average variable cost.

T F 49. If the Japanese demand for computers is elastic and the Canadian demand for
computers is inelastic, a profit-maximizing firm would charge a higher price to
Canadian buyers than to Japanese buyers.

T F 50. If the Australian government imposes a domestic content requirement of 75

percent on autos, at least 25 percent of an auto’s value must be produced in a
foreign country if that auto is to be sold in Australia.

T F 51. During the 1980s, the U.S. government imposed sugar import quotas in an
attempt to reduce its costs of maintaining price supports for U.S. sugar growers.
Figure 5.5 illustrates the television market for Mexico, assumed to be a small country that is
unable to affect the world price. S Mexico is the domestic supply schedule and D Mexico is the domestic
demand schedule. Suppose that Japan can supply televisions to Mexico at a price of $100 per set.
On the basis of this information, answer Questions 52–60.

Figure 5.5. Mexico’s Television Market

T F 52. Consider Figure 5.5. With free trade, Mexicans produce 4 TVs, consume 24 TVs,
and import 20 TVs.

T F 53. Consider Figure 5.5. With free trade, Mexican producer surplus equals $2,450
and Mexican consumer surplus equals $200.

T F 54. Consider Figure 5.5. Suppose that the governments of Mexico and Japan
negotiate a voluntary export agreement in which Japanese TV exports to Mexico
are limited to 8 units. Under the quota, the price of TVs in Mexico equals $250
while Mexicans produce 10 TVs and purchase 18 TVs.

T F 55. Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to
an increase in Mexican consumer surplus of $3,150.

T F 56. Consider Figure 5.5. Compared to free trade, the Japanese export quota leads to
an increase in Mexican producer surplus of $1,050.

T F 57. Consider Figure 5.5. The deadweight welfare loss to Mexico, as a result of the
Japanese export quota, totals $1,200.
T F 58. Consider Figure 5.5. The Japanese export quota’s revenue effect totals $1,200.

T F 59. Consider Figure 5.5. The government of Mexico collects 50 percent of the export
quota’s revenue effect, or $600, in the form of tax revenue.

T F 60. Consider Figure 5.5. Assuming that the revenue effect of the export quota accrues
to Japanese firms, the overall welfare loss to Mexico equals $2,100 as a result of
the quota.

ANSWERS

Answers to Multiple-Choice Questions

1. b 15. b 29. c 43. a 57. a
2. a 16. a 30. d 44. c 58. c
3. b 17. a 31. c 45. b 59. c
4. d 18. d 32. b 46. d 60. a
5. b 19. a 33. b 47. d 61. c
6. a 20. d 34. d 48. d 62. a
7. c 21. c 35. b 49. c 63. a
8. c 22. a 36. d 50. b 64. c
9. b 23. b 37. d 51. b 65. b
10. a 24. d 38. c 52. d 66. a
11. b 25. c 39. a 53. b
12. a 26. a 40. a 54. c
13. c 27. a 41. d 55. d
14. b 28. b 42. b 56. c

Answers to True-False Questions

1. F 13. T 25. T 37. F 49. T
2. T 14. T 26. F 38. T 50. F
3. F 15. T 27. T 39. T 51. T
4. T 16. F 28. T 40. T 52. T
5. F 17. F 29. F 41. F 53. F
6. T 18. T 30. F 42. F 54. T
7. T 19. T 31. T 43. F 55. F
8. F 20. F 32. T 44. F 56. T
9. T 21. F 33. F 45. T 57. F
10. F 22. T 34. T 46. T 58. T
11. F 23. F 35. T 47. T 59. F
12. F 24. T 36. F 48. F 60. T
SHORT ANSWER QUESTIONS

1. Is a tariff-rate quota a two-tier tariff? Why?

Answer: Yes. It allows a specified number of goods to be imported at one tariff rate,
whereas any imports above this level face a higher tariff rate.

2. What is an OMA?
Answer: An OMA involves limitations on export sales administered by one or more export-
ing nations.

ESSAY QUESTIONS

1. Describe some of the differences between tariffs and quotas?

Answer: Tariffs and quotas differ in their revenue effects and restrictive impacts on the
volume of trade. While quotas are easier to administer and manage, they do not provide the
government with revenue.

2. What are the intent and impact of domestic content requirements?

Answer: Domestic content requirements try to limit the practice of job outsourcing and also
encourage the development of domestic industry. They stipulate the minimum percentage of
a product’s value that must be produced in the home country for that product to be sold
there. Domestic content protection tends to impose welfare losses on the domestic economy
in the form of higher production costs and higher-priced goods.