FEB13085: International Trade Policy Problem Set 2 Solutions

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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?

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

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

Increases the optimal percentage tariff Signup and view all the answers

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

Decrease proportional to the tariff value Signup and view all the answers

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

1.5 Signup and view all the answers

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

30 Signup and view all the answers

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

80 units Signup and view all the answers

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

10 Signup and view all the answers

How does the monopolist maximize its profits?

By setting marginal revenue equal to 30 Signup and view all the answers

What is a specific tariff?

A tax on imports defined as an amount of currency per unit of the good. 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?

The domestic price of the good will fall. Signup and view all the answers

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

Consumers will benefit from lower prices. Signup and view all the answers

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

To maximize profits. Signup and view all the answers

Which factor influences import demand elasticity the most?

The availability of close substitutes. Signup and view all the answers

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

1.75 Signup and view all the answers

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

10 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?

Price increases in both countries Signup and view all the answers

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

2 Signup and view all the answers

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

Supply and demand remain constant Signup and view all the answers

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

Volume of trade decreases Signup and view all the answers

What does a lower import demand elasticity imply?

Lower reduction of imports due to a tariff Signup and view all the answers

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

Low import demand elasticity Signup and view all the answers

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

Inverse relationship Signup and view all the answers

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

Allows the monopoly to increase prices Signup and view all the answers

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

Higher terms-of-trade gains Signup and view all the answers

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

Import demand elasticity Signup and view all the answers