consider the following graph. The world market price under free trade is $6. sup

ID: 1204734 • Letter: C

Question

consider the following graph. The world market price under free trade is $6.

suppose Austria imposes a quota of 12 units, and Austria is a small country.

TRUE or FALSE, and explain why.

For questions (8)–(9) suppose Austria imposes a tariff of $3 per unit, and Austria is a large country.

(8). there is no trade for Austria.

(9). Austria’s terms of trade improve.

For questions (10) and (11), suppose Austria imposes a tariff of $1 per unit, and that Austria is a large country.(4 points each).

(10). Austria’s deadweight loss is smaller than $3.

(11). Suppose the domestic price in Austria after the tariff is $6.5, then Austria’s welfare increases relative to free trade.

When quota is 12 units, it means domestic supply = 12 and domestic demand = 24, where price = $7

(8) True

When tariff = $3, domestic price rises to $(6 + 3) = $9

At this price, domestic demand = domestic supply, so there is no import or export.

(9) True

(10) False

When tariff is $1, domestic price = $(6 + 1) = $7

Deadweight loss = Area b + Area e

= (1/2) x $1 x (12 - 9) + (1/2) x $1 x (27 - 24) = (1/2) x $1 x (3 + 3) = (1/2) x $1 x $6

= $3

(11) False

When a tariff is imposed, however small in amount, it creates a deadweight loss which is social welfare loss compared to free trade.

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