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?
What will be an ideal response?
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.
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The table above shows a total product schedule. Suppose that labor costs $20 per worker and fixed costs are $60. The total variable cost of producing 80 units equals
A) less than $50. B) more than $50 and less than $70. C) more than $70 and less than $90. D) more than $90 and less than $120. E) more than $120.
Currency traders expect the dollar to appreciate. What impact will this have on equilibrium in the foreign exchange market?
A) The dollar will appreciate, and the equilibrium quantity of dollars will increase. B) The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease. C) The dollar will appreciate, and the equilibrium quantity of dollars will decrease. D) The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined.