48. The US economy can produce and sell computer chips at a price of $12.00 per

Question

48. The US economy can produce and sell computer chips at a price of $12.00 per unit. In the international market computer chips sell for $16 per unit. To provide incentive for increasing production and the creation of new jobs locally, the US government signed an international trade agreement with neighboring countries and countries in Europe that will provide opportunities for import of foreign goods in exchange for the opening of opportunities for US exports abroad. In the first phase of the implementation of the agreement US goods – computer chips – were made immediately available for the international market. The effect of the US export of computer chips in the local market is;

A. Price falls; the quantity of computer chips produced in the U.S. will increase and the quantity exported to increase and there would be NO deadweight losses.

B. Price falls; the quantity of computer chips produced in the U.S. to increase and the total quantity imported to fall and the consumer surplus will increase.

C. Price rises; The quantity of computer chips produced in the U.S. to increase and the total quantity exported to increase but consumer surplus will fall leading to a deadweight loss.

D. Price rises; the quantity of computer chips produced in the U.S. will increase and the quantity exported to increase and there would be NO deadweight losses.

E. Price will not change; the quantity of computer chips produced in the U.S. to increase and the total quantity exported to fall as a result the total surplus will decrease.

Explanation / Answer

Option C

Price rises; The quantity of computer chips produced in the U.S. to increase and the total quantity exported to increase but consumer surplus will fall leading to a deadweight loss.

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