International Economics 7th Edition Gerber Test Bank

International Economics 7th Edition
Gerber Test Bank

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International Economics, 7e (Gerber)
Chapter 6 The Theory of Tariffs and Quotas
6.1 Introduction: Tariffs and Quotas
1) In a small country, the net national cost of tariff protection is equal to the reduction in
consumer surplus minus
A) the increase in government revenue and the increase in producer surplus.
B) the increase in government revenue.
C) the increase in producer surplus.
D) the efficiency loss and the consumption side loss.
Answer: A
Topic: Introduction: Tariffs and Quotas
Difficulty: Moderate
Objective: LO 6.1 Use supply and demand analysis to explain and illustrate consumer and
producer surplus.
AACSB: Application of knowledge
Scenario 6.1
Suppose that United States furniture makers import $100 of wood and parts in order to make a
dining room table selling for $500. The imports have no tariff or quota restrictions.
2) Based on Scenario 6.1 above, value added in the United States is

A) $500.
B) $600.
C) $400.
D) $300.
Answer: C
Difficulty: Easy
Objective: LO 6.3 Differentiate and explain the resource allocation and income distribution
effects of tariffs and quotas.
3) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room
tables, the effective rate of protection is
A) 20 percent.
B) 25 percent.
C) 30 percent.
D) 40 percent.
Answer: B
Objective: LO 6.4 Use tariff data on inputs and outputs to compare effective and nominal rates
of protection.
1
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4) Based on Scenario 6.1 above, if a tariff of 20 percent is placed on imports of dining room
tables, and another tariff of 50 percent is placed on imports of wood and parts, then the effective
rate of protection on tables made in the United States is
A) 70 percent.
B) 50 percent.
C) 20 percent.
D) 12.5 percent.
Answer: D
Difficulty: Easy
of protection.
5) Consumer surplus is equal to the area

A) under the demand curve and above the supply curve.
B) above the supply curve and below the price line.
C) under the demand curve.
D) under the demand curve and above the price line.
Answer: D
Difficulty: Easy
producer surplus.
6) Producer surplus is equal to the area

A) under the demand curve and above the supply curve.
B) above the supply curve and below the price line.
C) under the supply curve.
D) under the demand curve and above the price line.
Answer: B
Difficulty: Easy
producer surplus.
2
7) Tariffs reallocate income from
A) consumers to producers.
B) producers to consumers.
C) government to producers.
D) consumers to foreigners.
Answer: A
Difficulty: Easy
8) The production side efficiency loss of a tariff is caused by

A) higher profits gained by foreign producers.
B) the expansion of relative inefficient domestic production.
C) the contraction of domestic consumption.
D) the increase in government revenue.
Answer: B
9) Which of the following would be a deadweight loss from a tariff?

A) The shift of consumer surplus to government
B) The increase in producer surplus
C) The decrease in consumer surplus
D) The decrease in consumer surplus due to a drop in consumption
Answer: D
Difficulty: Easy
Objective: LO 6.2 Graphically demonstrate the effects of tariffs and quotas on prices, output,
and consumption for small and large countries.
10) Large countries can improve their welfare by levying a tariff if it does NOT
A) reduce rent seeking elsewhere in the economy.
B) create a deadweight loss.
C) lead to retaliation by the nation's trading partners.
D) increase domestic production of the good.
Answer: C
Difficulty: Easy
3
11) Suppose a manufacturer of software develops a new computer program that sells for $50.
The $50 cost includes $0.25 for the CD it is stored on, $5 for the labor of the company software
programmers, and $1.75 for packaging materials and transportation costs. Value added by the
software company is
A) $49.75.
B) $48.25.
C) $48.
D) $44.75.
Answer: C
of protection.
12) High tariffs on intermediate inputs

A) increase the effective rate of protection on final goods.
B) have no impact on the effective rate of protection on final goods.
C) decrease the effective rate of protection on final goods.
D) lower the nominal rate of protection on final goods.
Answer: C
of protection.
13) Which of the following is NOT correct about the effects of a tariff on an imported product?
A) Tariffs benefit domestic producers by raising price and domestic output.
B) Tariffs increase government revenue.
C) Tariffs mean higher prices and less consumption for consumers of the product.
D) Tariffs increase the efficiency of how resources are allocated.
Answer: D
Difficulty: Easy
4
14) Which of the following is FALSE?
A) Consumer surplus increases after a tariff is placed on imports.
B) Producer surplus increases after a tariff is imposed.
C) Government revenue increases after a tariff is imposed.
D) Deadweight losses result from tariffs.
Answer: A
Difficulty: Easy
15) Efficiency losses are

A) deadweight losses caused by consumers being prevented by tariffs from buying products at
the world price, products that they value more highly than that price.
B) the total loss in consumer surplus from a tariff.
C) the increase in producer surplus that is created by a tariff.
D) the deadweight loss that is created because domestic firms have to charge higher prices to
produce units of output than foreign firms would have to charge.
Answer: D
16) In order for large countries to successfully use tariffs to increase well-being,
A) they must have significant market power .
B) the deadweight loss created by the tariff must be greater than the government revenue the
tariff generates.
C) domestic production must increase more significantly than for the small country case.
D) domestic consumption and imports must decrease more significantly than in the small country
case.
Answer: A
Difficulty: Difficult
5
17) Nominal rates of protection
A) are always greater than effective rates of protection.
B) are always smaller than effective rates of protection.
C) refer to the tariffs placed on intermediate goods used to make the final good or service.
D) cannot be negative.
Answer: D
Difficulty: Easy
of protection.
18) Which of the following is a FALSE statement about issues/negotiations in the Doha
Development agenda?
A) It is intended to deal with economic development issues and trade barriers facing developing
countries that were not adequately addressed in the Uruguay Round.
B) Many developing countries are upset with the levels of tariffs and other barriers that
industrialized countries use to protect agriculture, clothing and textiles.
C) Industrialized countries want developing countries to reduce their tariffs, which on average
are higher than the rates of richer countries.
D) Developing countries don't use tariffs, and they want higher income countries to follow their
model.
Answer: D
Difficulty: Easy
19) Average tariff rates are highest for

A) high-income countries.
B) middle-income countries.
C) low-income countries.
D) industrialized countries.
Answer: C
Difficulty: Easy
of protection.
6
Use the graph below and the following information to answer the next question(s). The world
price of soybeans is $2.00 per bushel, and the importing country is small enough not to affect the
world price.
Figure 6.1
20) Based on Figure 6.1, suppose the government puts a tariff of $0.25 per bushel on soybean
imports. How much will the tariff reduce imports?
A) Imports will decrease by 10 million bushels.
B) Imports will decrease by 20 million bushels.
C) Imports will decrease by 60 million bushels.
D) Imports will not change after the tariff.
Answer: B
producer surplus.
7
21) Based on Figure 6.1, given a tariff of $0.25 per bushel on soybean imports, how much will
domestic production increase?
A) Domestic firms will increase output by 10 million bushels.
B) Domestic firms will increase output by 20 million bushels.
C) Domestic firms will increase output by 70 million bushels.
D) Domestic firms' production will not be changed by the tariff.
Answer: A
producer surplus.
22) Based on Figure 6.1, how much revenue will the government raise from a $0.25 per bushel
tariff on soybean imports?
A) The government will raise $2.5 million.
B) The government will raise $5 million.
C) The government will raise $15 million.
D) The government will raise $32.5 million.
E) The government will see no increase in income; because the country is small, foreign firms
will simply not serve it after the tariff is imposed.
Answer: C
producer surplus.

A) Tariffs are a relatively easy tax to administer and often form an important part of revenue for
low-income countries.
B) Taxes on income, sales, and property require more complex accounting systems than do
tariffs.
C) Low-income countries often have large informal markets with the sales of many goods and
services not being recorded, which makes it difficult to apply many kinds of taxes.
D) Tariffs are not an attractive tax option for most low-income countries, so they mostly rely on
quota licenses for revenue.
Answer: D
Difficulty: Easy
8
24)
The graph above shows supply and demand in the domestic market without trade. Consumer
surplus without trade is represented by area
A) P1-E-Po
B) P1-E-0
C) Po-E-0
D) P1-E-Qo
Answer: A
producer surplus.
AACSB: Analytical thinking
9
25)
The graph above shows supply and demand in the domestic market without trade. Producer
surplus without trade is represented by area
A) P1-E-Po
B) P1-E-0
C) Po-E-0
D) P1-E-Qo
Answer: B
producer surplus.
26) The new GATS and TRIPS are separate agreements negotiated within the WTO framework
as part of the Uruguay Round that apply to
A) services and transportation.
B) agriculture and textiles.
C) services and intellectual property.
D) textiles and transportation.
Answer: C
Difficulty: Easy
10
27)
The graph above shows domestic supply and demand with trade. With trade, this country can
purchase at the world price, Pw.
Which of the following areas represents consumer surplus with trade?

A) Pw-A-0
B) Pw-B-Qd-0
C) P1-B-Pw
D) P1-B-A-0
Answer: C
producer surplus.
11
28)
The graph above shows domestic supply and demand with trade in a SMALL country. With
trade, this country can purchase at the world price, Pw.
Suppose that this country imposes a $5 per unit tariff on this good. Which of the following will
NOT occur?
A) Government revenue will increase.
B) Domestic consumers will be worse off.
C) Domestic producers will be better off.
D) The gains to the winners will exceed the losses to the losers from the tariff.
Answer: D
12
29)
The graph above shows domestic supply and demand with trade in a SMALL country. With
trade, this country can purchase at the world price, Pw.
Suppose that this country imposes a $5 per unit tariff on this good. Which of the following is
true?
A) The domestic price will rise by $5.
B) Consumers will be better off.
C) There will not be deadweight losses due to this tariff, since it is a small country.
D) Producers will not increase domestic production.
Answer: A
13
30)
The graph above shows domestic supply and demand with trade. With trade, this country can
purchase at the world price, Pw.
Which of the following areas represents producer surplus with trade?

A) Pw-A-0
B) Pw-B-Qd-0
C) P1-B-Pw
D) P1-B-A-0
Answer: A
producer surplus.
31) Relative to the domestic market without trade, when the country is able to import from
abroad at a price less than the domestic price, which of the following will NOT occur?
A) The country will be worse off.
B) CS + PS will increase.
C) Producer surplus will decrease.
D) Consumer surplus will increase.
Answer: A
producer surplus.
32) Nontariff barriers to trade are less transparent than tariffs.

Answer: TRUE
Difficulty: Easy
Objective: LO 6.5 Compare and contrast quotas and tariffs.
14
33) If the effective rate of protection is greater than the nominal rate of protection, there must be
tariffs on intermediate products.
Answer: FALSE
Difficulty: Easy
of protection.
34) Since the mid-1980s, tariff rates in most nations have risen.
Answer: FALSE
Difficulty: Easy
of protection.
35) Tariff revenue is an important source of operating revenue for many governments of high
income countries.
Answer: FALSE
Difficulty: Easy
36) Deadweight losses are the only potential cost associated with tariffs, which is why they are
preferred to quotas.
Answer: FALSE
Difficulty: Easy
37) The rules for respecting property rights as they relate to trade were negotiated during the
Uruguay Round (1986-1994) and culminated in the Trade-Related Aspects of Intellectual
Property Rights (TRIPS) agreement.
Answer: TRUE
Difficulty: Easy
15
38) How is the Agreement on Textiles and Clothing impacting trade today?
Answer: It phased out quotas as of 2005, but allows for temporary restrictions which the U.S.
and EU have used regarding Chinese clothing exports.
39) Why is the Doha Round called the Doha Development Round?
Answer: Because it pays particular attention to the trade issues facing developing countries
Difficulty: Easy
40) What has been the most significant obstacle to progress in the Doha Round?
Answer: Agriculture and agricultural support policies
Difficulty: Easy
41) What are some of the long-run costs of tariffs?

Answer: Increased rent seeking, slower innovation, possible loss of exports due to retaliation
42) Developing countries have identified which key issues as important to them in current trade
talks?
Answer: The costs and benefits to them of implementing the commitments they made in the
Uruguay Round; access to life-saving medicines under the terms of TRIPS is a problem;
industrialized countries' protection of sectors such as agriculture, clothing and textiles, that are
important to developing countries.
16
43) What do developing countries want regarding agriculture in the Doha Round?
Answer: To limit government practices that block their access to markets or that subsidize
production in high income countries
44) Draw a graph showing the effects of imposing a tariff in the small country case. Describe the
results, using the concepts of producer surplus, consumer surplus and deadweight loss.
Specifically address the effects on consumers, producers, government revenue and overall
national well-being, connecting those effects to areas of your graph.
Answer: Students should create a graph similar to Figure 6.3 and to describe results similar to
Table 6.1.
producer surplus.
45) Carefully explain why tariffs create deadweight losses.

Answer: Tariffs reduce domestic consumption and increase domestic production. This means
that some consumers that value this good more than its cost are not able to purchase it, which
reduces consumer surplus without benefitting anyone. Likewise, domestic producers increase
their production, but their costs are higher than world costs. Thus that additional cost of
production does not benefit the producers; it is simply a waste of resources.
17
46) Carefully explain how the imposition of a tariff is different for a large country (that can
affect the world price) than a small country.
Answer: For a small country, imposition of a tariff unambiguously reduces total benefits to the
country. For a large country, the effect is less clear. Since a large country can have an impact on
the world price, the reduction in domestic demand due to the tariff may be sufficiently large to
cause the world price to fall or to encourage foreign producers to reduce their prices to avoid
losing market share. In this case, while domestic producers still gain and domestic consumers
still lose, the overall benefits to the country may or may not fall. If the fall in the world price is
sufficient, foreign producers are essentially paying for much of the tariff in the form of lower
prices, and this gain may exceed the deadweight losses.
47)
The graph above shows a small country that can import at the world price of Pw. Suppose that
the government imposes a tariff of $T per unit (and suppose that this does not raise the domestic
price so much that there will be no trade.
Use the graph above to illustrate the effects of the tariff. Show the new areas of consumer
surplus, producer surplus, and government revenue, and the deadweight losses due to the tariff.
Who wins and who loses from the tariff?
Answer: See Figure 6.3 in the text. Consumer surplus decreases, producer surplus and
government revenue increase, and total surplus falls, since there are deadweight losses.
Consumers lose, producers and the government win, and the country as a whole loses (since
there are deadweight losses).
producer surplus.
18
6.2 Analysis of Quotas
1) In which way are tariffs different from quotas?

A) They reduce the volume of imported products.
B) They raise the price of the imported products to consumers.
C) They increase the domestic quantity supplied of the product.
D) They raise government revenue.
Answer: D
Topic: Analysis of Quotas
2) In the case of a small country, consumer surplus

A) decreases less with a tariff than with an equivalent quota.
B) decreases less with a quota than with an equivalent tariff.
C) decreases the same with tariffs and equivalent quotas.
D) increases more with quotas.
Answer: C
3) Which of the following is NOT an expected benefit of reducing nontariff barriers to trade?
A) Fewer firms to compete with
B) Lower prices for many goods
C) Increase in the volume of exports and imports
D) Improved overall economic welfare
Answer: A
Difficulty: Easy
4) In economic terms, tariffs are preferred to quotas because

A) domestic manufacturers gain more producer surplus.
B) there is less loss of consumer surplus.
C) quotas create a greater production inefficiency.
D) given the way quotas are usually administered, tariffs cause a smaller net national welfare
loss.
Answer: D
19
5) A real cost of tariffs and quotas that is difficult to measure is that they
A) encourage rent seeking.
B) shift income from consumers to producers.
C) limit the quantity of imports.
D) reduce wages.
Answer: A
Difficulty: Easy

A) At the end of the twentieth century, more and more traded goods and services incorporated
specialized knowledge and unique ideas.
B) Pharmaceuticals, computer hardware, telecommunications equipment, and other high
technology products are valuable because of the innovation and research they incorporate.
C) Developing countries usually strongly advocate the protection of intellectual property rights.
D) The protection given to creators and innovators varied greatly internationally until
standardization began with the signing of the TRIPs agreement.
Answer: C
7) Which type of restriction on quantity of imports is the most transparent?

A) Quota
B) Licensing requirements
C) Voluntary export restraints
D) Government procurement policies
Answer: A
Difficulty: Easy
8) In the case of a small country, producer surplus

A) increases more with a tariff than with an equivalent quota.
B) increases more with a quota than with an equivalent tariff.
C) is not changed by tariffs or quotas.
D) increases the same amount with tariffs and equivalent quotas.
Answer: D
Difficulty: Easy
20
9) Both tariffs and quotas lead to a decrease in imports, a decrease in domestic consumption, and
an increase in domestic production.
Answer: TRUE
Difficulty: Easy
10) Over time, quotas usually lead to larger deadweight losses than tariffs.
Answer: TRUE
11) Nontariff measures are generally much more difficult to eliminate than tariffs and quotas
because they are embedded more deeply in national economic policies.
Answer: TRUE
Difficulty: Easy
12) An increase in domestic demand for a product protected by a quota results in an increase in
producer surplus for domestic firms, while for a tariff it would result in more imports.
Answer: TRUE
13) Intellectual property rights protection is a critical issue for the pharmaceutical industry
among others.
Answer: TRUE
Difficulty: Easy
14) Internationally, the TRIPS agreement is uniformly regarded as a positive step for world
prosperity.
Answer: FALSE
Difficulty: Easy
21
15) What are the three major types of quotas?
Answer: Formal quotas outright limit the quantity of imports; import licenses; voluntary export
restraints
Difficulty: Easy
16) When did intellectual property rights become part of trade agreements?
Answer: Uruguay Round
Difficulty: Easy
17) What is the name of the agreement related to intellectual property rights?
Answer: TRIPS, or Trade-Related Aspects of Intellectual Property Rights agreement
Difficulty: Easy
18) Give an example of an industry that would seek intellectual property rights protection
because its product incorporates innovation and research.
Answer: Pharmaceuticals, computer hardware, telecommunications equipment, other high
technology products
Difficulty: Easy
19) What is Joseph Stiglitz's main criticism regarding intellectual property rights protection?
Answer: the enforcement costs it imposes on developing countries
20) Give an example of a nontariff measure that could reduce the quantity of imports or exports.
Answer: Special fees imposed on importers, burdensome and unnecessary customs procedures,
unreasonable technical standards, phony health and safety standards, state trading companies,
anticompetitive practices, restrictive government procurement rules, corruption
22
21) If politicians decide to proceed with protection, why might economists prefer tariffs to
quotas? Explain at least three reasons.
Answer:
• The greater welfare loss from quotas since quota permits are not generally sold
• The inability of quotas to respond to increases in domestic demand except through higher
prices and increased producer surplus. With tariffs, the volume of imports simply adjusts to
changing market conditions and market prices are less volatile.
• Tariffs are more transparent and probably less costly to administer.
• Tariffs favor the most efficient foreign producers. They don't arbitrarily limit entry or
discourage innovation by foreign firms (but they do for domestic firms, meaning we are creating
a situation that rewards foreigners for being innovative and efficient, something not in the long
run best interests of domestic firms).
22) Describe intellectual property rights. What agreements have been reached regarding their
protection? What are the benefits and the costs of protecting intellectual property rights?
Answer: Intellectual property rights included copyright and related rights for literary and artistic
work as well as industrial property rights such as trademarks and patents. TRIPS is an
international agreement specifying the rules for respecting intellectual property rights as they
relate to trade and was reached as part of the Uruguay Round. If intellectual property rights are
not protected, it restricts trade flows. Exporters are reluctant to sell into a market if they know
their ideas or brand will be stolen or copied by local firms. Research and innovation are more
likely because protecting intellectual property gives financial incentives to firms and individuals
to do research and continue to innovate. But protecting intellectual property rights means that
high costs for enforcement are imposed on developing countries; it is not well established
empirically that the benefits of innovation outweigh the costs of access, especially for developing
countries that find access to new technology curtailed by having to pay royalties and fees.
23
23)
The graph above shows a small country that can import at the world price of Pw and currently
imports (Qd-Qs). Suppose that the government imposes quota of 80% of the current import
amount (and suppose that this does not raise the domestic price so much that there will be no
trade).
Use the graph above to illustrate the effects of the quota. Show the new areas of consumer
surplus, producer surplus, and any other relevant areas, and the deadweight losses due to the
quota. Who wins and who loses from the tariff?
Answer: See Figure 6.7 in the text. Consumer surplus decreases, and producer surplus increases,
and total surplus falls, since there are deadweight losses. Consumers lose, producers win, and the
country as a whole loses (since there are deadweight losses. The unclear piece of this analysis is
what happens to the area that would have represented tariff revenue, for an equivalent tariff (area
c in Figure 6.7). If the government auctions import licenses, this area goes to the government,
and there is no difference from the analysis of a tariff. If import licenses are distributed to foreign
producers, then area c is a loss to the domestic economy (although not to the world economy.
producer surplus.
24) Use a graph to demonstrate why quotas are likely to cause increased deadweight losses over
time.
Answer: Over time, demand for most goods rises, as populations increase (as well as for other
reasons). The graph should show an increase in demand, given a constant quota amount. Since
the quota does not change, the effect of the quota will be to raise price even more than
previously. This increases the size of the deadweight loss due to underconsumption of the good
and increase the deadweight loss due to domestic overproduction.
24

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International Economics 7th Edition Gerber Test Bank

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International Economics 7th Edition

Gerber Test Bank

6.1 Introduction: Tariffs and Quotas

2) Based on Scenario 6.1 above, value added in the United States is

5) Consumer surplus is equal to the area

6) Producer surplus is equal to the area

8) The production side efficiency loss of a tariff is caused by

9) Which of the following would be a deadweight loss from a tariff?

12) High tariffs on intermediate inputs

15) Efficiency losses are

19) Average tariff rates are highest for

23) Which of the following is FALSE?

Which of the following areas represents consumer surplus with trade?

Which of the following areas represents producer surplus with trade?

32) Nontariff barriers to trade are less transparent than tariffs.

41) What are some of the long-run costs of tariffs?

45) Carefully explain why tariffs create deadweight losses.

1) In which way are tariffs different from quotas?

2) In the case of a small country, consumer surplus

4) In economic terms, tariffs are preferred to quotas because

6) Which of the following is FALSE?

7) Which type of restriction on quantity of imports is the most transparent?

8) In the case of a small country, producer surplus

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