FEB13085: International Trade Policy Problem Set 2 Solutions
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Questions and Answers

What does the optimal tariff equal to in the given context?

  • Equal to the change in marginal cost
  • Proportional to the monopoly price
  • Twice the change in relative foreign and domestic price of imports
  • Inverse of the elasticity of import demand (correct)

    • In the scenario described, what does the monopolist's profit maximization condition indicate?

  • Import demand equals 10
  • Import demand decreases with an increase in marginal cost
  • Import demand is inversely proportional to the tariff
  • Import demand equals 50 (correct)

    • How does the monopolist's marginal cost change with a tariff?

  • Increases by twice the value of the tariff (correct)
  • Becomes inversely proportional to the import demand elasticity
  • Decreases by the value of the tariff
  • Remains unchanged

    • What is the relationship between import demand elasticity and protectionism?

    <p>As import demand elasticity decreases, protectionism tends to increase.</p> Signup and view all the answers

    How does a decrease in import demand elasticity affect the optimal percentage tariff?

    <p>Increases the optimal percentage tariff</p> Signup and view all the answers

    What happens to the monopolist's exports when a tariff is imposed?

    <p>Decrease proportional to the tariff value</p> Signup and view all the answers

    What is the import demand elasticity of the good in the scenario described?

    <p>1.5</p> Signup and view all the answers

    In the scenario, what is the price charged by the monopolist for the good?

    <p>30</p> Signup and view all the answers

    How many units are exported by the monopolist in the free trade equilibrium?

    <p>80 units</p> Signup and view all the answers

    What is the marginal cost of the monopolist in this scenario?

    <p>10</p> Signup and view all the answers

    How does the monopolist maximize its profits?

    <p>By setting marginal revenue equal to 30</p> Signup and view all the answers

    What is a specific tariff?

    <p>A tax on imports defined as an amount of currency per unit of the good.</p> Signup and view all the answers

    If the world price of a good falls below Pw and a country imposes an import quota, what will happen?

    <p>The domestic price of the good will fall.</p> Signup and view all the answers

    What happens if a country faces the world price Pw and trades freely without any restrictions?

    <p>Consumers will benefit from lower prices.</p> Signup and view all the answers

    In monopoly pricing, what is the objective of the monopolist?

    <p>To maximize profits.</p> Signup and view all the answers

    Which factor influences import demand elasticity the most?

    <p>The availability of close substitutes.</p> Signup and view all the answers

    In a scenario of free trade between Indonesia and Thailand, what is the world price of pineapples?

    <p>1.75</p> Signup and view all the answers

    What is the volume of trade between Indonesia and Thailand when they engage in free trade?

    <p>10</p> Signup and view all the answers

    What effect does a 0.5 tariff imposed by Indonesia have on the price of pineapples in each country?

    <p>Price increases in both countries</p> Signup and view all the answers

    After the 0.5 tariff, what is the price of pineapples in Indonesia?

    <p>2</p> Signup and view all the answers

    Under free trade, what happens to the quantity of pineapples supplied and demanded in Thailand?

    <p>Supply and demand remain constant</p> Signup and view all the answers

    What is the impact of a 0.5 tariff on the volume of trade between Indonesia and Thailand?

    <p>Volume of trade decreases</p> Signup and view all the answers

    What does a lower import demand elasticity imply?

    <p>Lower reduction of imports due to a tariff</p> Signup and view all the answers

    If a country has a 100% optimal percentage tariff, what does this indicate?

    <p>Low import demand elasticity</p> Signup and view all the answers

    In the context of tariffs, what is the relationship between the optimal percentage tariff and import demand elasticities?

    <p>Inverse relationship</p> Signup and view all the answers

    How does a monopoly facing a linear demand curve affect its pricing strategies?

    <p>Allows the monopoly to increase prices</p> Signup and view all the answers

    What is the significance of lower deadweight losses in the context of tariffs on inelastic goods?

    <p>Higher terms-of-trade gains</p> Signup and view all the answers

    What economic concept is associated with the optimal percentage tariff being 82%?

    <p>Import demand elasticity</p> Signup and view all the answers

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