AP Microeconomics Quiz: International Trade And Public Policy

18 questions · exam conditions

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International Trade And Public PolicyQuestion 1 of 18

Based on the trade graph shown, Country E is a small importer of rice. The world price is $P_w = $12 per bag. A tariff raises the domestic price to $P_t = $15. At $P_w$ , domestic quantity demanded is 500 and domestic quantity supplied is 200. At $P_t$ , domestic quantity demanded is 440 and domestic quantity supplied is 260. Using these values, what is the tariff revenue collected by the government?

$0, because tariffs create only deadweight loss.

$360, equal to $(15-12)\times(500-440)$.

$540, equal to $(15-12)\times(440-260)$.

$780, equal to $(15-12)\times(500-200)$.

$900, equal to $(15-12)\times260$.

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AP Microeconomics Quiz

AP Microeconomics Quiz: International Trade And Public Policy

Practice International Trade And Public Policy in AP Microeconomics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on International Trade And Public Policy, giving you a quick way to practice the rules, question types, and explanations that matter most for AP Microeconomics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

$0, because tariffs create only deadweight loss.
$360, equal to $(15-12)\times(500-440)$.
$540, equal to $(15-12)\times(440-260)$. (correct answer)
$780, equal to $(15-12)\times(500-200)$.
$900, equal to $(15-12)\times260$.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A tariff is a tax on imports that raises the domestic price and generates revenue equal to the tariff rate times the quantity imported after the tariff. The data shows the price rising from $12 to $15 per bag, with post-tariff imports of 180 bags (440-260), yielding revenue of $3 × 180 = $540. This justifies choice C, as the calculation matches $540 using (15-12) × (440-260). A common misconception is that tariff revenue is based on pre-tariff imports, but it's calculated using post-tariff import levels. To analyze such policies, always compare the domestic price to the world price to find the tariff wedge. Then, trace the effects: consumers lose from higher prices, producers gain from increased production, and government gains revenue but society faces deadweight loss.

Question 2

Based on the trade graph shown, Country F is a small importer of laptops. Under free trade, the world price is $P_w = $400. Domestic quantity demanded is 1,200 and domestic quantity supplied is 300. The government then imposes an import quota of 600 units. The quota raises the domestic price to $P_q = $450, at which domestic quantity demanded is 1,000 and domestic quantity supplied is 400. What is the effect of the quota on domestic price and imports?

Domestic price falls to $350, and imports rise from 900 to 1,000 units.
Domestic price rises to $450, and imports fall from 900 to 600 units. (correct answer)
Domestic price stays at $400, and imports fall from 900 to 600 units.
Domestic price rises to $450, and imports rise from 900 to 1,000 units.
Domestic price rises to $450, and imports fall from 1,200 to 1,000 units.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. An import quota limits the quantity of imports, creating scarcity that drives up the domestic price. The data shows the price rising from $400 to $450, with imports falling from 900 (1,200-300) to 600 units. This justifies choice B, as the quota increases the price to $450 and reduces imports from 900 to 600. A common misconception is that quotas lower prices like free trade, but they raise prices similar to tariffs by restricting supply. To analyze such policies, always compare the domestic price to the world price to see the elevation. Then, trace the effects: consumers lose from higher prices and less quantity, producers gain from higher prices and more production, and government may gain if quotas are auctioned.

Question 3

Based on the trade graph shown, Country G is a small importer of cheese. The world price is $P_w = $4 per pound. The government imposes a tariff that raises the domestic price to $P_t = $6. At $P_w$ , domestic quantity demanded is 300 and domestic quantity supplied is 120. At $P_t$ , domestic quantity demanded is 240 and domestic quantity supplied is 160. Which welfare change must occur in the domestic market as a result of the tariff?

Consumer surplus increases, producer surplus decreases, and imports increase.
Consumer surplus decreases, producer surplus increases, and imports decrease. (correct answer)
Consumer surplus increases, producer surplus increases, and imports increase.
Consumer surplus decreases, producer surplus decreases, and imports increase.
Consumer surplus increases, producer surplus decreases, and imports decrease.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A tariff raises the domestic price by taxing imports, leading to changes in surpluses and trade volume. The data shows the price increasing from $4 to $6 per pound, decreasing consumer surplus with lower quantity demanded from 300 to 240, increasing producer surplus with higher supply from 120 to 160, and reducing imports. This justifies choice B, as consumer surplus falls, producer surplus rises, and imports decrease. A common misconception is that tariffs increase overall welfare, but they create deadweight loss despite producer gains. To analyze such policies, always compare the domestic price to the world price to identify surplus shifts. Then, trace the effects: consumers lose area above the price line, producers gain below it, and government revenue partially offsets losses.

Question 4

Based on the trade graph shown, Country A is a small importer of steel. Domestic demand is $D$ and domestic supply is $S$ . The world price is $P_w = $20. The government imposes a specific tariff of $t = $6 per ton, so the domestic price becomes $P_t = $26. At $P_w$ , domestic quantity demanded is 90 and domestic quantity supplied is 30. At $P_t$ , domestic quantity demanded is 70 and domestic quantity supplied is 40. Using a supply-and-demand-for-imports framework, what is the effect of the tariff on the domestic price and the quantity of imports?

Domestic price rises to $26 per ton, and imports fall from 60 tons to 30 tons. (correct answer)
Domestic price falls to $14 per ton, and imports rise from 60 tons to 70 tons.
Domestic price rises to $26 per ton, and imports rise from 60 tons to 70 tons.
Domestic price stays at $20 per ton, and imports fall from 60 tons to 30 tons.
Domestic price rises to $26 per ton, and imports fall from 90 tons to 70 tons.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A tariff is a tax on imported goods that increases the price of imports, making them less competitive with domestic products. The data shows the domestic price rising from the world price of $20 to $26 per ton, with imports decreasing from 60 tons (90-30) to 30 tons (70-40). This justifies choice A, as the tariff raises the domestic price to $26 and reduces imports from 60 to 30 tons. A common misconception is that tariffs lower domestic prices, but they actually increase them by restricting imports. To analyze such policies, always compare the domestic price to the world price to see the wedge created. Then, trace the effects: consumers face higher prices and lower quantity, producers gain from higher prices and increased production, and the government collects tariff revenue.

Question 5

Based on the trade graph shown, Country H is a small importer of bicycles. The world price is $P_w = $150. The government imposes a specific tariff of $t = $30, raising the domestic price to $P_t = $180. At $P_w$ , domestic quantity demanded is 1,000 and domestic quantity supplied is 200. At $P_t$ , domestic quantity demanded is 850 and domestic quantity supplied is 300. Which statement correctly compares the change in domestic production and the change in imports?

Domestic production rises by 100 units, and imports fall by 250 units. (correct answer)
Domestic production falls by 100 units, and imports rise by 250 units.
Domestic production rises by 150 units, and imports fall by 100 units.
Domestic production rises by 100 units, and imports fall by 200 units.
Domestic production falls by 50 units, and imports fall by 150 units.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A tariff taxes imports, raising the domestic price and shifting production and import levels. The data shows production rising from 200 to 300 units (+100) and imports falling from 800 (1,000-200) to 550 (850-300) (-250). This justifies choice A, as production increases by 100 and imports decrease by 250 units. A common misconception is that tariffs reduce domestic production, but they actually boost it by protecting local suppliers. To analyze such policies, always compare the domestic price to the world price to see production incentives. Then, trace the effects: consumers reduce consumption due to higher prices, producers expand output, and government collects revenue on remaining imports.

Question 6

Based on the trade graph shown for imported aluminum in Country I, the world price is $P_W = 2$ per pound. At $2$ , domestic quantity demanded is 300 million lb and domestic quantity supplied is 120 million lb. The government imposes a tariff that raises the domestic price to $2.50$ . Which change is consistent with the tariff's effect on domestic quantity demanded and imports?

Domestic quantity demanded rises, and imports rise.
Domestic quantity demanded falls, and imports fall. (correct answer)
Domestic quantity demanded rises, and imports fall.
Domestic quantity demanded stays the same, and imports fall.
Domestic quantity demanded falls, and imports rise.

Explanation: Analyzing the effects of trade policies such as tariffs on demand and imports is a key skill in understanding international trade and public policy. A tariff elevates the domestic price, leading consumers to demand less and reducing the quantity of imports. The graph shows the tariff raising the price from $2$ to $2.50$ per pound, decreasing domestic demand below 300 million pounds and imports below 180 million. This justifies choice B, as domestic quantity demanded falls and imports fall. A common misconception is that tariffs increase demand, but they decrease it due to higher prices, unlike subsidies which might boost consumption. To analyze, compare demand and imports at world versus elevated domestic prices. Then, trace effects: consumers reduce purchases losing surplus, producers increase supply gaining surplus, and government gains tariff revenue.

Question 7

Based on the trade graph shown, Country B is a small importer of coffee. The world price is $P_w = $8 per pound. The government sets an import quota that limits imports to 20 million pounds. At $P_w$ , domestic quantity demanded is 80 million pounds and domestic quantity supplied is 40 million pounds. With the quota, the domestic price rises to $P_q = $10, at which domestic quantity demanded is 70 and domestic quantity supplied is 50. Which group gains as a result of the quota (ignoring how quota licenses are allocated)?

Domestic consumers of coffee gain because the domestic price falls from $8 to $10.
Foreign exporters gain because the quota lowers the domestic price below the world price.
Domestic producers of coffee gain because the domestic price rises and domestic production increases. (correct answer)
Domestic producers of coffee lose because domestic production falls from 50 to 40 million pounds.
Domestic consumers of coffee gain because imports rise from 40 to 20 million pounds.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. An import quota is a direct limit on the quantity of a good that can be imported, which reduces supply and raises the domestic price. The data shows the domestic price rising from the world price of $8 to $10 per pound, with domestic production increasing from 40 to 50 million pounds. This justifies choice C, as domestic producers gain from the higher price and increased production. A common misconception is that quotas benefit consumers like tariffs do, but both raise prices, harming consumers while helping producers. To analyze such policies, always compare the domestic price to the world price to see the restriction's impact. Then, trace the effects: consumers lose from higher prices and reduced consumption, producers gain from higher prices and more output, and government may gain if quota licenses are sold.

Question 8

Based on the trade graph shown, Country D is a small importer of textiles. The world price is $P_w = $5 per yard. The government imposes a tariff of $t = $2 per yard, raising the domestic price to $P_t = $7. At $P_w$ , domestic quantity demanded is 140 and domestic quantity supplied is 60. At $P_t$ , domestic quantity demanded is 110 and domestic quantity supplied is 80. Which statement correctly describes who gains and who loses from the tariff in the domestic market?

Domestic consumers gain and domestic producers lose because the domestic price rises.
Domestic consumers lose and domestic producers gain because the domestic price rises. (correct answer)
Domestic consumers gain and domestic producers gain because imports increase.
Domestic consumers lose and domestic producers lose because the domestic price falls.
Domestic consumers gain and domestic producers gain because the domestic price falls.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A tariff is a tax on imported goods that raises the domestic price above the world price. The data shows the price increasing from $5 to $7 per yard, harming consumers with higher costs and benefiting producers with increased output from 60 to 80. This justifies choice B, as consumers lose from the price rise while producers gain. A common misconception is that tariffs benefit all domestic groups, but they actually hurt consumers by reducing their surplus. To analyze such policies, always compare the domestic price to the world price to see the increase. Then, trace the effects: consumers lose surplus due to higher prices, producers gain surplus from higher prices and output, and government collects revenue.

Question 9

Based on the trade graph shown for imported solar panels in Country G, the world price is $P_W = 200$ per panel. At $200, domestic quantity demanded is 600 thousand panels and domestic quantity supplied is 100 thousand panels. The government imposes a specific tariff of $50 per panel, raising the domestic price to $250. Which statement correctly describes the effect on domestic quantity supplied and the quantity of imports?

Domestic quantity supplied decreases, and imports decrease.
Domestic quantity supplied increases, and imports decrease. (correct answer)
Domestic quantity supplied increases, and imports increase.
Domestic quantity supplied stays the same, and imports decrease.
Domestic quantity supplied decreases, and imports increase.

Explanation: Analyzing the effects of trade policies such as tariffs on quantities is a key skill in understanding international trade and public policy. A specific tariff adds a fixed amount to the price of imports, raising the domestic price and encouraging more domestic supply while reducing imports. The graph indicates the $50 tariff increases the price to $250, boosting domestic supply above 100 thousand panels and cutting imports below 500 thousand. This matches choice B, as domestic quantity supplied increases and imports decrease. A common misconception is that tariffs decrease domestic supply, but they actually increase it, unlike quotas which have similar effects but no direct revenue. To evaluate, compare supply and import levels at world versus tariff-adjusted prices. Then, trace effects: consumers buy less at higher prices, producers expand output, and government collects revenue on remaining imports.

Question 10

Based on the trade graph shown, Country C is a small importer of solar panels. The world price is $P_w = $200 per panel. The government provides a production subsidy of $s = $40 per panel to domestic producers (paid per unit produced). As a result, the domestic consumer price remains $200, but domestic producers receive $240 per panel. Before the subsidy at $P_w$ , domestic quantity demanded is 1,000 and domestic quantity supplied is 200. After the subsidy, at the consumer price $200$ , domestic quantity demanded remains 1,000, while domestic quantity supplied rises to 350. What is the effect of the subsidy on imports?

Imports increase from 800 panels to 1,150 panels.
Imports decrease from 800 panels to 650 panels. (correct answer)
Imports remain at 800 panels because the world price is unchanged.
Imports decrease from 1,000 panels to 350 panels.
Imports increase from 800 panels to 850 panels.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A production subsidy is a payment to domestic producers per unit produced, which increases supply without changing the consumer price directly. The data shows imports decreasing from 800 panels (1,000-200) to 650 panels (1,000-350) while the consumer price remains at $200. This justifies choice B, as the subsidy boosts domestic production, reducing imports from 800 to 650 panels. A common misconception is that subsidies raise domestic prices like tariffs, but subsidies keep consumer prices at the world level while encouraging more local output. To analyze such policies, always compare the domestic price to the world price to identify if it's unchanged. Then, trace the effects: consumers are unaffected in price but may benefit from variety, producers gain from higher effective prices, and government bears the cost of the subsidy.

Question 11

Based on the trade graph shown for imported smartphones in Country D, the world price is $P_W = 300$ each. At $300, domestic quantity demanded is 1.2 million and domestic quantity supplied is 0.4 million. The government provides a per-unit subsidy to domestic smartphone producers, shifting domestic supply right, and the domestic price remains $300 because the country is a small importer. What is the effect of the subsidy on the quantity of imports?

Imports increase because domestic supply increases at the world price.
Imports decrease because domestic production rises while domestic price stays at $300. (correct answer)
Imports stay the same because subsidies do not change quantities under free trade.
Imports increase because domestic demand rises when producers are subsidized.
Imports become zero because the subsidy forces the domestic price above $300.

Explanation: Analyzing the effects of trade policies such as production subsidies is a key skill in understanding international trade and public policy. A production subsidy shifts the domestic supply curve rightward, increasing domestic output at the world price for a small country, thereby reducing imports. The data indicates that with the subsidy, domestic supply increases while the price stays at $300, decreasing imports below the initial 0.8 million units. This supports choice B, as imports decrease due to higher domestic production at the unchanged price. A common misconception is that subsidies raise domestic prices like tariffs, but subsidies keep prices at world levels while quotas or tariffs raise them. To assess such policies, compare domestic quantities at the world price before and after the subsidy. Then, trace effects: consumers may benefit from stable prices, producers gain from subsidies and increased surplus, and government spends on the subsidy, potentially affecting total welfare.

Question 12

Based on the trade graph shown, Country I is a small importer of sugar. Under free trade, the world price is $P_w = $10 per unit. Domestic quantity demanded is 1,000 and domestic quantity supplied is 400. The government replaces free trade with a binding import quota of 300 units, which raises the domestic price to $P_q = $12. At $P_q$ , domestic quantity demanded is 900 and domestic quantity supplied is 600. In a supply-and-demand-for-imports framework, which statement is correct about the import level and the domestic price?

Imports are 300 units and the domestic price is $12 per unit. (correct answer)
Imports are 500 units and the domestic price is $12 per unit.
Imports are 300 units and the domestic price remains $10 per unit.
Imports are 900 units and the domestic price is $12 per unit.
Imports are 300 units and the domestic price falls to $8 per unit.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. An import quota directly caps imports, raising the domestic price to clear the market with limited foreign supply. The data shows imports limited to 300 units and the price rising from $10 to $12 per unit. This justifies choice A, as imports are 300 units at the new domestic price of $12. A common misconception is that quotas keep prices at the world level, but they raise prices like tariffs by restricting supply. To analyze such policies, always compare the domestic price to the world price to determine the quota's binding effect. Then, trace the effects: consumers face higher prices and lower quantity, producers increase output and surplus, and government may allocate quota rents.

Question 13

Based on the trade graph shown, Country J is a small importer of corn. The world price is $P_w = $3 per bushel. The government imposes a tariff of $t = $1, raising the domestic price to $P_t = $4. At $P_w$ , domestic quantity demanded is 1,600 and domestic quantity supplied is 700. At $P_t$ , domestic quantity demanded is 1,400 and domestic quantity supplied is 800. Which outcome is consistent with these data?

The domestic price rises, domestic consumption falls, and imports fall from 900 to 600 bushels. (correct answer)
The domestic price falls, domestic consumption rises, and imports rise from 900 to 600 bushels.
The domestic price rises, domestic consumption rises, and imports rise from 900 to 600 bushels.
The domestic price rises, domestic production falls, and imports rise from 900 to 600 bushels.
The domestic price stays at $3, domestic consumption falls, and imports fall from 1,600 to 1,400 bushels.

Explanation: Trade policy analysis is the skill of evaluating how government interventions affect domestic markets and trade flows. A tariff imposes a tax on imports, elevating the domestic price and altering consumption and import patterns. The data shows the price rising from $3 to $4 per bushel, consumption falling from 1,600 to 1,400, and imports decreasing from 900 (1,600-700) to 600 (1,400-800). This justifies choice A, as the price rises, consumption falls, and imports drop from 900 to 600. A common misconception is that tariffs increase consumption, but they reduce it by raising prices. To analyze such policies, always compare the domestic price to the world price to assess the impact. Then, trace the effects: consumers lose from reduced quantity and higher costs, producers gain from increased production, and government earns revenue.

Question 14

Based on the trade graph shown for imported wheat in Country E, the world price is $P_W = 5$ per bushel. At $5$ , domestic quantity demanded is 90 million bushels and domestic quantity supplied is 30 million bushels. The government imposes a tariff that raises the domestic price to $7$ per bushel. In the standard welfare decomposition for a tariff (consumer surplus, producer surplus, government revenue, deadweight loss), which welfare component increases because of the tariff?

Consumer surplus increases
Producer surplus decreases
Government tariff revenue increases (correct answer)
Total surplus increases
Deadweight loss becomes negative (a gain)

Explanation: Analyzing the welfare effects of trade policies such as tariffs is a key skill in understanding international trade and public policy. A tariff creates government revenue by taxing imports, while altering consumer and producer surpluses and introducing deadweight loss. The graph demonstrates the tariff raising the price from $5$ to $7$ per bushel, generating revenue on the reduced imports. This aligns with choice C, as government tariff revenue increases from zero to a positive amount. A common misconception is that tariffs increase total surplus, but they actually decrease it due to deadweight loss, unlike free trade. To evaluate welfare, compare surpluses at domestic versus world prices. Then, trace changes: consumers lose surplus, producers gain, government gains revenue, but overall total surplus falls due to inefficiencies.

Question 15

Based on the trade graph shown for imported bicycles in Country J, free trade occurs at world price $P_W = 150$ per bicycle. At $150$ , domestic quantity demanded is 80 thousand and domestic quantity supplied is 20 thousand, so imports are 60 thousand. The government imposes a tariff that raises the domestic price to $180$ , reducing imports to 30 thousand. In the standard tariff welfare diagram, which welfare change occurs due to the tariff?

Consumer surplus increases by the amount of the tariff revenue.
Producer surplus decreases because domestic price rises.
Government revenue increases, and total surplus decreases due to deadweight loss. (correct answer)
Total surplus increases because imports fall.
Foreign exporters capture all of the tariff revenue, so government revenue is zero.

Explanation: Analyzing the welfare effects of trade policies such as tariffs is a key skill in understanding international trade and public policy. A tariff generates government revenue but creates deadweight loss, reducing total surplus while redistributing from consumers to producers. The data illustrates the tariff increasing the price from $150$ to $180$ , producing revenue on 30 thousand imports but lowering total welfare. This aligns with choice C, as government revenue increases while total surplus decreases due to deadweight loss. A common misconception is that tariffs increase total surplus, but they cause net losses, unlike free trade; quotas similarly distort but without revenue. To evaluate welfare, compare surpluses at world and domestic prices. Then, trace changes: consumers lose, producers gain, government revenue rises, but overall efficiency declines.

Question 16

Based on the trade graph shown for imported roasted coffee in Country A, the world price is $P_W = 6$ per pound. At $6, domestic quantity demanded is 80 million lb and domestic quantity supplied is 20 million lb. The government imposes a specific tariff of $2 per pound on imported coffee, and the country is a price taker in world markets so the domestic price rises by the full tariff. What is the effect of the tariff on the domestic price and the quantity of imports?

Domestic price rises to $8 per pound, and imports fall to 30 million lb. (correct answer)
Domestic price falls to $4 per pound, and imports rise to 90 million lb.
Domestic price rises to $8 per pound, and imports rise to 60 million lb.
Domestic price stays at $6 per pound, and imports fall to 30 million lb.
Domestic price rises to $8 per pound, and imports fall to 90 million lb.

Explanation: Analyzing the effects of trade policies such as tariffs is a key skill in understanding international trade and public policy. A tariff is a tax imposed on imported goods that increases the domestic price by the amount of the tariff in a small country, reducing the quantity of imports. Based on the data, the tariff of $2 raises the domestic price from $6 to $8 per pound, decreasing imports from 60 million pounds to 30 million pounds as domestic supply increases and demand decreases. This outcome justifies choice A, as it correctly states the price rises to $8 and imports fall to 30 million pounds. A common misconception is that tariffs lower domestic prices, but they actually raise prices, unlike subsidies which can lower them. To evaluate trade policies, compare the domestic price to the world price before and after the policy. Then, trace the effects: consumers face higher prices and lose surplus, producers gain from increased production and surplus, and the government collects tariff revenue.

Question 17

Based on the trade graph shown for imported steel in Country B, the world price is $P_W = $400 per ton. At $400, domestic quantity demanded is 1,000 thousand tons and domestic quantity supplied is 300 thousand tons. The government sets an import quota of 400 thousand tons. Assuming the quota is binding, what happens to the domestic price and the quantity of imports compared with free trade?

Domestic price falls below $400 per ton, and imports rise above 700 thousand tons.
Domestic price rises above $400 per ton, and imports equal 400 thousand tons. (correct answer)
Domestic price stays at $400 per ton, and imports equal 400 thousand tons.
Domestic price rises above $400 per ton, and imports equal 700 thousand tons.
Domestic price falls below $400 per ton, and imports equal 400 thousand tons.

Explanation: Analyzing the effects of trade policies such as import quotas is a key skill in understanding international trade and public policy. An import quota limits the quantity of goods that can be imported, causing the domestic price to rise above the world price if the quota is binding. Based on the data, the binding quota of 400 thousand tons restricts imports below the free trade level of 700 thousand tons, raising the domestic price above $400 per ton. This matches choice B, which correctly indicates the price rises above $400 and imports equal 400 thousand tons. A common misconception is that quotas lower prices like subsidies, but quotas raise prices similar to tariffs, though without generating government revenue. To analyze such policies, compare the domestic price to the world price with and without the restriction. Then, trace the impacts: consumers lose surplus due to higher prices, producers gain surplus from increased production, and there is no government revenue but potential quota rents to importers.

Question 18

Based on the trade graph shown for imported cheese in Country H, under free trade the world price is $P_W = $4 per pound and imports are 50 million lb. The government replaces free trade with a binding import quota that limits imports to 20 million lb. Compared with free trade, which group is most likely to gain from the quota?

Domestic consumers of cheese
Domestic cheese producers (correct answer)
The market is unchanged because quotas do not affect price
Foreign exporters gain because the domestic price falls
All groups gain because the quota reduces deadweight loss

Explanation: Analyzing the effects of trade policies such as import quotas on groups is a key skill in understanding international trade and public policy. A binding quota limits imports, raising domestic prices and benefiting local producers through higher sales and prices. The data shows the quota reducing imports from 50 million to 20 million pounds, increasing the domestic price above $4. This supports choice B, as domestic cheese producers gain from the policy. A common misconception is that quotas benefit consumers like free trade, but they raise prices harming consumers, similar to tariffs but with potential rents to quota holders. To assess, compare group outcomes at world versus quota-constrained prices. Then, trace effects: consumers lose surplus, producers gain, and government may not gain revenue but efficiency is lost.