Microeconomics Quiz: International Trade And Public Policy
20 questions · exam conditions
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International Trade And Public PolicyQuestion 1 of 20

A small nation opens its television market to free trade. Its autarky price was $500 per television, while the world price is $300. The government then provides a $50 subsidy to domestic television producers for each unit they produce. What is the final price that domestic consumers will pay for a television?

$250
$300
$350
$450
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Microeconomics Quiz

Microeconomics Quiz: International Trade And Public Policy

Practice International Trade And Public Policy in 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 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

A small nation opens its television market to free trade. Its autarky price was $500 per television, while the world price is $300. The government then provides a $50 subsidy to domestic television producers for each unit they produce. What is the final price that domestic consumers will pay for a television?

  1. $250
  2. $300 (correct answer)
  3. $350
  4. $450
Explanation: In a small country open to trade, the domestic price is determined by the world price. Since the country's autarky price ($500) is above the world price ($300), it will be an importer of televisions. The domestic market price will be $300. A production subsidy is a payment to domestic producers; it does not affect the price that consumers pay. Consumers can still import televisions at the world price of $300, so the domestic market price will remain at $300. The subsidy will increase domestic production, but the price for consumers is dictated by the world price.

Question 2

A small country imports 1,000 units of good M at the world price of $20 per unit. The government implements a quota limiting imports to 600 units, causing the domestic price to rise to $25. Domestic production increases from 200 to 400 units. What is the primary difference between the welfare effects of this quota versus an equivalent tariff?

  1. The quota generates larger deadweight losses because it completely eliminates price competition from foreign producers
  2. The quota creates identical welfare effects but transfers quota rents to import license holders rather than government (correct answer)
  3. The quota produces smaller deadweight losses because domestic producers face less adjustment pressure than under tariffs
  4. The quota generates higher consumer surplus because import quantities are guaranteed rather than price-dependent
Explanation: Both a quota limiting imports to 600 units and a tariff that achieves the same import reduction create identical deadweight losses from consumption and production distortions. The key difference is in the distribution of rents: a tariff generates government revenue equal to the tariff rate times import quantity, while a quota creates rents equal to the price differential times quota quantity that accrue to whoever holds import licenses. The deadweight losses (consumption and production triangles) are identical. Choice A incorrectly suggests different efficiency effects. Choice C wrongly implies different production distortions. Choice D misunderstands that quotas restrict quantity, typically reducing consumer surplus more than tariffs.

Question 3

A customs union is formed between Countries P and Q, eliminating tariffs between them while maintaining a common external tariff of 15% on imports from Country R. Before the union, all three countries traded freely. If Country P now imports good W from Country Q instead of from the lower-cost producer Country R, this represents:

  1. Trade creation because it increases total trade volume between union members P and Q
  2. Trade diversion because it reduces Country R's export opportunities in favor of union members
  3. Trade creation because it eliminates tariff barriers and promotes regional economic integration
  4. Trade diversion because it shifts imports from a more efficient producer to a less efficient union partner (correct answer)
Explanation: When analyzing customs unions, you need to distinguish between trade creation (efficiency gains) and trade diversion (efficiency losses). The key is whether trade shifts toward or away from the most efficient producer. In this scenario, Country P switches from importing good W from Country R (the lower-cost producer) to Country Q after the customs union forms. This happens because the 15% external tariff makes Country R's goods artificially expensive compared to Country Q's tariff-free goods within the union. Since P is now buying from a less efficient producer (Q) instead of the most efficient one (R), this represents trade diversion - answer D is correct. Answer A incorrectly focuses on trade volume rather than efficiency. While trade between P and Q increases, this doesn't automatically mean trade creation if it comes at the expense of more efficient trade relationships. Answer B identifies this as trade diversion but gives the wrong reason. The issue isn't simply that Country R loses export opportunities - it's specifically that trade shifts from a more efficient to a less efficient producer. Answer C confuses the mechanism with the outcome. While the customs union does eliminate internal tariffs and promote regional integration, the specific scenario described (importing from a higher-cost union partner instead of a lower-cost outside producer) represents trade diversion, not creation. Remember this pattern: trade creation occurs when unions enable trade that wouldn't otherwise happen efficiently, while trade diversion occurs when unions redirect trade away from the most efficient global producers toward less efficient union partners.

Question 4

Country F exports agricultural products and imports manufactured goods. The government simultaneously implements a 10% export subsidy on agricultural products and a 15% tariff on manufactured imports. If both policies successfully achieve their intended sectoral protection goals, what is the most likely impact on the country's production possibility frontier utilization?

  1. Movement toward the frontier as both sectors become more competitive and efficient through government support
  2. Movement along the frontier toward agricultural production, representing optimal specialization in comparative advantage
  3. Movement away from the frontier as resources shift toward less efficient uses in both sectors (correct answer)
  4. No change in frontier utilization because export subsidies and import tariffs have offsetting efficiency effects
Explanation: When you encounter questions about trade policies like export subsidies and import tariffs, focus on how these interventions affect economic efficiency and resource allocation relative to the production possibility frontier (PPF). Both policies create artificial incentives that distort market signals. The 10% export subsidy makes agricultural production appear more profitable than it naturally would be, encouraging overproduction in this sector even when resources could be used more efficiently elsewhere. Meanwhile, the 15% import tariff artificially raises the price of manufactured goods, making domestic manufacturing seem more competitive than it actually is, drawing resources into less efficient domestic production. When resources flow toward artificially supported but less efficient uses in both sectors, the economy moves away from its PPF. The country produces less total output than it could achieve with optimal resource allocation, representing a deadweight loss from both policies combined. Answer A is incorrect because government subsidies and tariffs don't make sectors truly more competitive or efficient—they create artificial advantages that mask underlying inefficiencies. Answer B misses the point because while the country may have comparative advantage in agriculture, the subsidy encourages overproduction beyond the efficient level, and the tariff simultaneously pulls resources toward inefficient manufacturing. Answer D incorrectly assumes the policies cancel each other out, but both distort resource allocation in ways that reduce overall efficiency. Remember: Trade interventions that artificially support sectors typically move economies away from their production frontiers by encouraging inefficient resource allocation, regardless of the country's natural comparative advantages.

Question 5

Country D implements an import quota on steel that reduces imports from 800 tons to 500 tons monthly, causing domestic steel prices to rise from $100 to $120 per ton. Domestic steel production increases from 200 tons to 350 tons. If the government auctions import licenses competitively, what is the quota rent per ton?

  1. $15 per ton, representing the efficiency gain from increased domestic production
  2. $25 per ton, reflecting the total cost of the quota system including administrative expenses
  3. $20 per ton, equal to the price increase caused by the import restriction (correct answer)
  4. $30 per ton, calculated as the domestic price premium plus the competitive auction premium
Explanation: When you encounter import quota problems, focus on understanding that quota rent represents the windfall profit created by artificial scarcity. The quota restricts supply, driving up the domestic price, and someone captures the value of that price difference. In this scenario, the import quota reduced steel imports from 800 to 500 tons, causing domestic prices to rise from $100 to $120 per ton. The quota rent per ton equals the difference between the new domestic price and what the price would have been without the quota (the original price). Therefore, the quota rent is $120−100=20120 - 100 = 20 $ per ton. When the government auctions import licenses competitively, importers bid up to this $20 premium because that's the profit they can earn by bringing in steel at world prices and selling at the higher domestic price. Answer A incorrectly calls this an "efficiency gain." Quotas actually create deadweight loss, not efficiency gains. Answer B suggests the $25 includes administrative costs, but quota rent specifically refers to the pure economic rent from the price differential, not administrative expenses. Answer D claims there's an additional "competitive auction premium" beyond the price increase, but competitive bidding ensures the government captures exactly the quota rent – no more, no less. Remember: quota rent always equals the domestic price premium created by the restriction. Don't get distracted by mentions of efficiency gains or additional premiums – stick to the basic price difference calculation.

Question 6

Two countries engage in trade where Country C exports 100 units of good X at $15 per unit and imports 80 units of good Y at $25 per unit. If Country C unilaterally eliminates all trade barriers while its trading partner maintains a 10% tariff on good X, what is the most likely outcome for Country C's economic efficiency?

  1. Efficiency decreases because unilateral free trade creates an unfair disadvantage against protected foreign industries
  2. Efficiency decreases because reduced export competitiveness from the partner's tariff outweighs domestic gains
  3. Efficiency remains unchanged because trade barriers only affect income distribution, not allocative efficiency
  4. Efficiency increases because eliminating domestic distortions improves resource allocation regardless of partner policies (correct answer)
Explanation: When analyzing unilateral trade liberalization, focus on how eliminating domestic trade barriers affects your country's resource allocation, regardless of what trading partners do. The key insight is that trade barriers create domestic economic distortions that harm efficiency even when other countries maintain their own barriers. Country C's elimination of trade barriers improves economic efficiency because it removes domestic distortions that prevent optimal resource allocation. When you eliminate tariffs, quotas, or other barriers, domestic consumers gain access to goods at world prices, domestic producers face proper competitive pressure, and resources flow to their most productive uses. These efficiency gains occur independently of whether trading partners reciprocate with their own liberalization. Answer A incorrectly assumes that unilateral free trade creates unfairness that reduces efficiency. However, economic efficiency measures optimal resource use, not competitive balance between countries. Answer B makes the error of focusing primarily on export effects from the partner's tariff while ignoring the substantial domestic efficiency gains from eliminating import barriers. The 10% tariff on Country C's exports does create some deadweight loss, but this doesn't outweigh the efficiency improvements from domestic liberalization. Answer C wrongly claims trade barriers only affect distribution, not efficiency. Trade barriers actually create significant deadweight losses and misallocate resources across sectors. Remember this principle: a country benefits from eliminating its own trade barriers even when other countries don't reciprocate, because the primary gains come from improving domestic resource allocation, not from achieving "fair" trade relationships.

Question 7

Country Alpha exports textiles and imports machinery. If Alpha's government provides a $5 per unit export subsidy for textiles while simultaneously imposing a $3 per unit tariff on machinery imports, what is the most likely combined effect on Alpha's terms of trade and welfare?

  1. Terms of trade improve and welfare increases because both policies favor Alpha's export sector over imports
  2. Terms of trade worsen and welfare decreases because the export subsidy reduces export prices more than the tariff raises import prices (correct answer)
  3. Terms of trade remain unchanged while welfare decreases due to production and consumption distortions from both policies
  4. Terms of trade improve while welfare decreases because distorted resource allocation offsets any price advantages
Explanation: The export subsidy encourages increased textile production and exports, which tends to depress world textile prices (worsening Alpha's terms of trade). The import tariff reduces machinery imports but doesn't directly improve export prices. For a small country, the export subsidy typically worsens terms of trade more than the tariff improves them. Both policies create deadweight losses: the subsidy distorts production toward textiles beyond comparative advantage, while the tariff creates standard import protection inefficiencies. Choice A ignores that export subsidies typically worsen terms of trade. Choice C incorrectly assumes no terms of trade effect. Choice D wrongly suggests terms of trade improve.

Question 8

Two countries, X and Y, trade freely in good Z. Country X can produce good Z at a constant cost of $5 per unit, while Country Y produces it at $8 per unit. If Country Y imposes a $2 per unit tariff on imports of good Z, and the world price remains at $5, what is the most likely outcome for resource allocation efficiency?

  1. Efficiency improves in Country Y because domestic producers become more competitive internationally
  2. Global efficiency decreases as Country Y shifts from low-cost imports to higher-cost domestic production (correct answer)
  3. Efficiency remains constant because the tariff revenue exactly offsets the production cost difference
  4. Global efficiency increases because reduced trade dependence stabilizes both countries' domestic markets
Explanation: With the tariff, Country Y's consumers face a price of 7(7 (5 world price + $2 tariff), making some domestic production at 8uncompetitivebutclosertoviability.However,anyshifttowarddomesticproductioninCountryYrepresentsamovefromefficient(8 uncompetitive but closer to viability. However, any shift toward domestic production in Country Y represents a move from efficient (5 cost) to less efficient ($8 cost) production, reducing global allocative efficiency. The tariff distorts the price signal that guides resources to their most productive uses. Choice A incorrectly suggests protection improves competitiveness rather than masking inefficiency. Choice C misunderstands that transfers don't eliminate real resource costs. Choice D ignores the efficiency costs of moving away from comparative advantage.

Question 9

Country A has a comparative advantage in producing wheat and imports steel from Country B. If Country A implements a $10 per ton tariff on steel imports, and the domestic steel industry experiences a 15% increase in production while consumer surplus decreases by $2 million, what can be concluded about the net welfare effect in Country A?

  1. Net welfare decreases because the deadweight loss from reduced trade exceeds any domestic producer gains (correct answer)
  2. Net welfare increases because tariff revenue and producer surplus gains exceed consumer surplus losses
  3. Net welfare remains unchanged because tariff revenue exactly compensates for the consumer surplus reduction
  4. Net welfare increases because import substitution enhances national security and reduces trade dependence
Explanation: A tariff creates deadweight loss by reducing mutually beneficial trade. The increase in domestic production and decrease in consumer surplus are classic signs of inefficient resource allocation. The tariff distorts comparative advantage, leading to higher-cost domestic production replacing lower-cost imports. While the government collects tariff revenue and domestic producers gain, these transfers don't offset the deadweight loss from reduced trade volume. Choice B incorrectly assumes transfers create net gains. Choice C misunderstands that tariff revenue is a transfer, not a net welfare gain. Choice D confuses economic efficiency with non-economic considerations.

Question 10

Country Beta has the following trade data: Textile exports: 500 units at $10 each; Machinery imports: 300 units at $20 each. The government is considering either a 20% export tax on textiles or a 25% import tariff on machinery.

Based on the trade data shown, if Beta implements the export tax and experiences a 15% reduction in textile exports while domestic textile consumption increases by 30 units, what can be concluded about the policy's impact on domestic welfare?

  1. Domestic welfare decreases due to production distortions, despite increased domestic consumption of textiles (correct answer)
  2. Domestic welfare increases because consumers gain access to 30 additional units previously exported at higher prices
  3. Domestic welfare remains neutral because the government tax revenue exactly offsets producer losses
  4. Domestic welfare increases because reduced exports improve Beta's terms of trade in the textile market
Explanation: When analyzing export taxes and their welfare effects, you need to consider how trade restrictions create deadweight losses through production and consumption distortions, even when they might appear to benefit domestic consumers. Let's trace through what happens with Beta's 20% export tax on textiles. Initially, textile producers export 500 units at $10 each. The export tax reduces exports by 15% (to 425 units) while domestic consumption increases by 30 units. This seems positive on the surface, but the welfare analysis reveals otherwise. The export tax creates a wedge between the world price and domestic price, causing producers to reduce output since they receive less for their goods. While domestic consumers do get access to 30 additional units at a lower price than the world market rate, this gain is more than offset by the production inefficiency. Producers lose surplus from reduced exports and lower prices, and the economy loses the comparative advantage benefits from specializing in textile production. Option B incorrectly assumes consumer gains automatically improve overall welfare, ignoring producer losses and efficiency costs. Option C wrongly suggests tax revenue perfectly compensates for economic losses – tax revenue is a transfer, not a net welfare gain. Option D misapplies terms of trade theory; a small country like Beta typically can't influence world prices through export restrictions. The correct answer is A because export taxes, like most trade restrictions, create deadweight losses that reduce overall domestic welfare despite any apparent consumer benefits. Study tip: Remember that trade restrictions typically harm overall welfare even when they help specific groups – always consider both producer and consumer effects plus efficiency losses.

Question 11

The domestic market for a good is described by the demand equation P=150−QDP = 150 - Q_D and the supply equation P=30+2QSP = 30 + 2Q_S. The world price for this good is PW=50P_W = 50. If the government imposes a $10 per-unit tariff on imports, what is the resulting deadweight loss?

  1. $25
  2. $50
  3. $75 (correct answer)
  4. $100
Explanation: This is a multi-step calculation. First, find quantities under free trade (at PW=50P_W = 50). Domestic supply: 50=30+2QS⇒QS=1050 = 30 + 2Q_S \Rightarrow Q_S = 10. Domestic demand: 50=150−QD⇒QD=10050 = 150 - Q_D \Rightarrow Q_D = 100. Next, find quantities with the tariff. The new domestic price is PT=50+10=60P_T = 50 + 10 = 60. New domestic supply: 60=30+2QS′⇒QS′=1560 = 30 + 2Q_S' \Rightarrow Q_S' = 15. New domestic demand: 60=150−QD′⇒QD′=9060 = 150 - Q_D' \Rightarrow Q_D' = 90. The deadweight loss consists of two triangles. The production distortion loss is 0.5 \times (P_T - P_W) \times (Q_S' - Q_S) = 0.5 \times 10 \times (15 - 10) = \25.Theconsumptiondistortionlossis. The consumption distortion loss is 0.5 \times (P_T - P_W) \times (Q_D - Q_D') = 0.5 \times 10 \times (100 - 90) = $50. Total deadweight loss is \25 + $50 = $75).

Question 12

A small country that imports textiles is considering an import quota to protect its domestic producers. If the government issues import licenses to foreign firms for free, how would the welfare effect of the quota compare to a tariff that restricts imports to the exact same quantity?

  1. The quota and tariff would have identical effects on national welfare.
  2. The quota would result in a larger decrease in national welfare than the tariff. (correct answer)
  3. The quota would result in a smaller decrease in national welfare than the tariff.
  4. The quota would increase national welfare, while the tariff would decrease it.
Explanation: A tariff and a quota that restrict imports to the same level will have the same effect on consumer surplus, producer surplus, and deadweight loss. The key difference is the disposition of the revenue equivalent. With a tariff, the government collects revenue equal to (tariff per unit) x (quantity of imports). With a quota, this same value becomes 'quota rent'. If the government gives the licenses to foreign firms, this rent is transferred to foreigners, representing an additional loss to the importing country's national welfare compared to the tariff, where the revenue stays within the country.

Question 13

The government of a small country that imports microchips imposes a prohibitive tariff. A tariff is defined as prohibitive if it is high enough to eliminate all imports. Which of the following correctly describes the consequence of this policy?

  1. The government's tariff revenue is maximized.
  2. Total domestic surplus is equal to what it would be under autarky.
  3. Domestic producer surplus is maximized compared to all other trade policies.
  4. The deadweight loss is equal to the total gains from trade that would occur under free trade. (correct answer)
Explanation: A prohibitive tariff raises the domestic price to the autarky level, eliminating all imports. Because imports are zero, the government's tariff revenue is zero. The market outcome (price and quantity) is identical to autarky (no trade). Therefore, total domestic surplus is also the same as under autarky. The deadweight loss of a policy is the reduction in total surplus compared to the efficient outcome, which is free trade. Since the prohibitive tariff reverts the market to the autarky level of surplus, the entire potential gain from trade is lost. This loss is the deadweight loss of the tariff.

Question 14

The nation of Autocania produces cars, which requires steel as a key input. Autocania's car market is closed to international trade, but its steel market is open, and it imports steel. If the government imposes a tariff on imported steel, what is the most likely impact on the domestic market for cars?

  1. The price of cars will decrease, and the quantity sold will increase.
  2. The supply of cars will shift right, leading to a lower price.
  3. The demand for cars will shift left, leading to a lower price.
  4. The price of cars will increase, and the quantity sold will decrease. (correct answer)
Explanation: A tariff on imported steel raises the domestic price of steel. Since steel is an input in car production, this increases the cost of manufacturing cars. An increase in input costs causes the supply curve for the final product (cars) to shift to the left (a decrease in supply). In the domestic car market, a leftward shift of the supply curve, with the demand curve unchanged, results in a higher equilibrium price and a lower equilibrium quantity of cars sold.

Question 15

A country imposes a 'tariff-rate quota' (TRQ) on sugar imports. This means that imports up to a certain quantity (the quota) are allowed at a low tariff rate, while any imports above that quantity are subject to a much higher tariff. If the country's demand for imports exceeds the quota level, what determines the domestic price of sugar?

  1. The world price plus the low tariff rate.
  2. The world price plus the high tariff rate. (correct answer)
  3. The average of the low and high tariff rates applied to the world price.
  4. The autarky price, as the high tariff is likely prohibitive.
Explanation: With a TRQ, there are two potential prices. If import demand is less than the quota amount, the price will be the world price plus the low tariff. However, if import demand exceeds the quota amount, importers will have to bring in additional units that are subject to the high tariff. The marginal unit imported will be subject to this high tariff, and in a competitive market, the single domestic price will be driven up to the level of the world price plus the high tariff. The importers of the first units (within the quota) will earn a rent equal to the difference between the two tariff rates.

Question 16

The domestic market for a good in a small country has a price elasticity of demand of -1.5 and a price elasticity of supply of 2.0. The country imports this good. If the government imposes a 10% tariff, what is the most likely outcome?

  1. The quantity of imports will fall by more than the quantity of domestic production rises. (correct answer)
  2. The quantity of domestic production will rise by more than the quantity of imports falls.
  3. Domestic producers' revenue will fall substantially due to the higher input costs.
  4. The tariff revenue collected will exceed the total loss in consumer surplus.
Explanation: A 10% tariff will raise the domestic price by 10%. Using the elasticities: domestic quantity demanded will fall by 15% (10% × 1.5), and domestic quantity supplied will rise by 20% (10% × 2.0). The change in imports equals the sum of the decrease in consumption and the increase in domestic production. Therefore, imports fall by more than production rises, since the import reduction includes both the consumption decrease and the production increase.

Question 17

A country that exports raw timber voluntarily agrees to limit its exports to a major trading partner. This policy is known as a Voluntary Export Restraint (VER). From the perspective of the importing country, how does the welfare impact of this VER compare to a tariff that would result in the same level of imports?

  1. The VER is better, as it promotes goodwill with the trading partner.
  2. The VER and the tariff have identical welfare impacts for the importing country.
  3. The VER is worse, because the equivalent of tariff revenue is captured by foreign exporters. (correct answer)
  4. The VER is better, because consumer surplus is higher than it would be under the tariff.
Explanation: A VER restricts the quantity of a good that can be imported, just like a quota. This raises the price in the importing country. The difference between the world price and the higher domestic price creates a rent. With a tariff, this rent would be collected by the importing country's government as revenue. With a VER, the exporting country's government or producers manage the restraint, so they are the ones who capture this rent (by selling the limited quantity at the higher price). Therefore, for the importing country, the VER results in a greater national welfare loss than a tariff that restricts imports by the same amount, because the rent is transferred abroad.

Question 18

A government that currently imposes a $20 tariff on an imported good is considering replacing it with a policy that gives a $20 subsidy to each unit of domestic production of that good. Both policies result in the same level of domestic production. How would the subsidy's effect on welfare compare to the tariff's?

  1. The subsidy is more efficient because it creates no consumption distortion. (correct answer)
  2. The tariff is more efficient because it raises revenue instead of costing the government money.
  3. Both policies have identical welfare effects since they yield the same domestic output.
  4. The subsidy is more efficient because it benefits consumers through a lower price.
Explanation: A tariff raises the domestic price, causing both a production distortion (inefficient domestic production is encouraged) and a consumption distortion (consumers are discouraged from buying units they value more than the world price). A production subsidy also encourages the same level of inefficient domestic production, so it has the same production distortion loss. However, a production subsidy does not raise the domestic price for consumers; the price remains at the world price. Therefore, the subsidy avoids the consumption distortion deadweight loss. Although the subsidy has a direct cost to the government, its deadweight loss is smaller than that of a tariff that achieves the same production level.

Question 19

A country that imports steel from a foreign monopoly supplier decides to impose a per-unit tariff on steel imports. How might the effect of this tariff on the domestic price differ from the standard competitive model where the world supply is perfectly elastic?

  1. The domestic price will not change because the foreign monopolist will absorb the entire tariff.
  2. The domestic price will increase by more than the amount of the tariff as the monopolist passes on the tax and more.
  3. The domestic price will increase, but by less than the full amount of the tariff. (correct answer)
  4. The tariff will force the foreign monopolist to behave competitively, lowering the domestic price.
Explanation: In the standard small country model with perfectly competitive world markets, the world supply is perfectly elastic, and the domestic price rises by the full amount of the tariff. However, when the foreign supplier is a monopolist, it faces a downward-sloping demand curve for its exports. The tariff acts like a tax on the monopolist. A monopolist will typically share the burden of a tax with consumers. The monopolist will raise its price, but to maintain sales volume, it will absorb part of the tax itself. Therefore, the domestic price will rise by less than the full amount of the tariff, as the price the monopolist receives (net of the tariff) will fall.

Question 20

The domestic supply and demand for sugar in a small country are linear. In autarky, the price is $100 per ton. Under free trade, the world price is $60 per ton, and the country imports 1,000 tons. The government then imposes a tariff that raises the domestic price to $70 per ton. Assuming the supply and demand curves have not shifted, what is the new quantity of imports?

  1. 250 tons
  2. 500 tons
  3. 750 tons (correct answer)
  4. 1,250 tons
Explanation: The gap between the autarky price ($100) and the world price ($60) is $40. This price gap corresponds to 1,000 tons of imports. Since the supply and demand curves are linear, the relationship between a price change and the change in the quantity of imports is also linear. The tariff raises the price from $60 to $70, a change of $10. This $10 price increase closes the price gap by $10/$40 = 1/4. Therefore, the quantity of imports will decrease by 1/4 of the original amount. The new import quantity will be 1,000−(1/4×1,000)=1,000−250=7501,000 - (1/4 \times 1,000) = 1,000 - 250 = 750 tons.