THE INTERNATIONAL ECONOMY
MULTIPLE-CHOICE QUESTIONS
1. A primary reason why nations conduct international trade is because:
a. Some nations prefer to produce one thing while others produce other things b. Resources are not equally distributed among all trading nations c. Trade enhances opportunities to accumulate profits d. Interest rates are not identical in all trading nations 2. A main advantage of specialization results from:
a. Economies of large-scale production
b. The specializing country behaving as a monopoly c. Smaller production runs resulting in lower unit costs d. High wages paid to foreign workers
3. International trade in goods and services is sometimes used as a substitute for all of the
following except:
a. International movements of capital b. International movements of labor
c. Domestic production of the same goods and services d. Domestic production of different goods and services 4. If a nation has an open economy, it means that the nation:
a. Allows private ownership of capital b. Has flexible exchange rates c. Has fixed exchange rates
d. Conducts trade with other countries
5. International trade forces domestic firms to become more competitive in terms of:
a. The introduction of new products b. Product design and quality c. Product price d. All of the above
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6. The movement to free international trade is most likely to generate short-term
unemployment in which industries?
a. Industries in which there are neither imports nor exports b. Import-competing industries
c. Industries that sell to domestic and foreign buyers d. Industries that sell to only foreign buyers 7. International trade is based on the idea that:
a. Exports should exceed imports b. Imports should exceed exports
c. Resources are more mobile internationally than are goods d. Resources are less mobile internationally than are goods
8. Arguments for free trade are sometimes disregarded by politicians because:
a. Maximizing domestic efficiency is not considered important b. Maximizing consumer welfare may not be a chief priority
c. There exist sound economic reasons for keeping one’s economy isolated from other
economies
d. Economists tend to favor highly protected domestic markets 9. How much physical output a worker producers in an hour’s work depends on:
a. The worker’s motivation and skill
b. The technology, plant, and equipment in use c. How easy the product is to manufacture d. All of the above
10. The largest amount of trade with the United States in recent years has been conducted by:
a. Canada b. Germany c. Mexico
d. United Kingdom 11. Increased foreign competition tends to:
a. Intensify inflationary pressures at home
b. Induce falling output per worker-hour for domestic workers c. Place constraints on the wages of domestic workers
d. Increase profits of domestic import-competing industries
12. __________ is the ability of a firm/industry, under free and fair market conditions, to
design, produce, and market goods and services that are better and/or cheaper than those of other firms/industries. a. Competitiveness b. Protectionism
c. Comparative advantage d. Absolute advantage
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13. A firm’s __________, relative to that of other firms, is generally regarded as the most
important determinant of competitiveness. a. Income level
b. Tastes and preferences c. Environmental regulation d. Productivity 14. Free traders maintain that an open economy is advantageous in that it provides all of the
following except:
a. Increased competition for world producers b. A wider selection of products for consumers
c. The utilization of the most efficient production methods d. Relatively high wage levels for all domestic workers 15. Recent pressures for protectionism in the United States have been motivated by all of the
following except:
a. U.S. firms shipping component production overseas b. High profit levels for American corporations
c. Sluggish rates of productivity growth in the United States d. High unemployment rates among American workers 16. International trade tends to cause welfare losses to at least some groups in a country:
a. The less mobile the country’s resources b. The more mobile the country’s resources c. The lower the country’s initial living standard d. The higher the country’s initial living standard 17. For a nation to maximize its productivity in a global economy:
a. Only imports are necessary b. Only exports are necessary
c. Both imports and exports are necessary d. Neither imports nor exports are necessary
18. A feasible effect of international trade is that:
a. A monopoly in the home market becomes an oligopoly in the world market b. An oligopoly in the home market becomes a monopoly in the world market c. A purely competitive firm becomes an oligopolist d. A purely competitive firm becomes a monopolist 19. International trade in goods and services tends to:
a. Increase all domestic costs and prices
b. Keep all domestic costs and prices at the same level
c. Lessen the amount of competition facing home manufacturers d. Increase the amount of competition facing home manufacturers
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20. The real income of domestic producers and consumers can be increased by:
a. Technological progress, but not international trade b. International trade, but not technological progress c. Technological progress and international trade
d. Neither technological progress nor international trade 21. In the United States, automobiles are:
a. Imported, but not exported b. Exported, but not imported c. Imported and exported
d. Neither exported nor imported
22. Technological improvements are similar to international trade since they both:
a. Provide benefits for all producers and consumers b. Increase the nation’s aggregate income
c. Reduce unemployment for all domestic workers
d. Ensure that industries can operate at less than full capacity
23. A sudden shift from import tariffs to free trade may induce short-term unemployment in:
a. Import-competing industries b. Industries that are only exporters
c. Industries that sell domestically as well as export d. Industries that neither import nor export 24. Recent empirical studies indicate that productivity performance in industries is:
a. Directly related to globalization of industries b. Inversely related to globalization of industries c. Not related to globalization of industries d. Any of the above 25. Empirical research indicates that __________ best enhances productivity gains for firms
and industries.
a. Local competition b. Regional competition c. Global competition d. No competition 26. By the mid-1990s, __________ banks had become the world’s largest in terms of total
assets.
a. British b. German c. Japanese d. American
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27. A reduced share of the world export market for the United States would be attributed to:
a. Decreased productivity in U.S. manufacturing b. High incomes of American households
c. Relatively low interest rates in the United States d. High levels of investment by American corporations 28. The dominant trading nation in the world market following World War II was:
a. United Kingdom b. Germany c. South Korea d. United States 29. A closed economy is one in which:
a. Imports exactly equal exports, so that trade is balanced b. Domestic firms invest in industries overseas
c. The home economy is isolated from foreign trade d. Saving exactly equals investment at full employment
30. Relative to countries with low ratios of exports to gross domestic product, countries
having high export to gross domestic product ratios are __________ vulnerable to changes in the world market. a. Less b. More c. Equally
d. Any of the above
CHAPTER 2
FOUNDATIONS OF MODERN TRADE THEORY
MULTIPLE-CHOICE QUESTIONS
1. The mercantilists would have objected to:
a. Export promotion policies initiated by the government b. The use of tariffs or quotas to restrict imports
c. Trade policies designed to accumulate gold and other precious metals d. International trade based on open markets
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2. Unlike the mercantilists, Adam Smith maintained that:
a. Trade benefits one nation only at the expense of another nation b. Government control of trade leads to maximum economic welfare c. All nations can gain from free international trade
d. The world’s output of goods must remain constant over time 3. The trading principle formulated by Adam Smith maintained that:
a. International prices are determined from the demand side of the market b. Differences in resource endowments determine comparative advantage c. Differences in income levels govern world trade patterns
d. Absolute cost differences determine the immediate basis for trade 4. Unlike Adam Smith, David Ricardo’s trading principle emphasizes the:
a. Demand side of the market b. Supply side of the market c. Role of comparative costs d. Role of absolute costs
5. When a nation requires fewer resources than another nation to produce a product, the
nation is said to have a (an):
a. Absolute advantage in the production of the product b. Comparative advantage in the production of the product c. Lower marginal rate of transformation for the product d. Lower opportunity cost of producing the product 6. According to the principle of comparative advantage, specialization and trade increase a
nation’s total output since:
a. Resources are directed to their highest productivity b. The output of the nation’s trading partner declines
c. The nation can produce outside of its production possibilities curve d. The problem of unemployment is eliminated 7. In a two-product, two-country world, international trade can lead to increases in:
a. Consumer welfare only if output of both products is increased b. Output of both products and consumer welfare in both countries
c. Total production of both products, but not consumer welfare in both countries d. Consumer welfare in both countries, but not total production of both products 8. As a result of international trade, specialization in production tends to be:
a. Complete with constant costs—complete with increasing costs b. Complete with constant costs—incomplete with increasing costs c. Incomplete with constant costs—complete with increasing costs d. Incomplete with constant costs—incomplete with increasing costs
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9. A nation that gains from trade will find its consumption point being located:
a. Inside its production possibilities curve b. Along its production possibilities curve c. Outside its production possibilities curve d. None of the above Using the data of Table 2.1, answer Questions 10 through 15.
Table 2.1. Output Possibilities for the U.S. and the U.K. Output per Worker per Day Country Tons of Steel Televisions United States 5 45 United Kingdom 10 20 10. Refer to Table 2.1. The United States has the absolute advantage in the production of:
a. Steel
b. Televisions
c. Both steel and televisions d. Neither steel nor televisions 11. Refer to Table 2.1. The United Kingdom has a comparative advantage in the production
of:
a. Steel
b. Televisions
c. Both steel and televisions d. Neither steel nor televisions 12. Refer to Table 2.1. If trade opens up between the United States and the United Kingdom,
American firms should specialize in producing: a. Steel
b. Televisions
c. Both steel and televisions d. Neither steel nor televisions 13. Refer to Table 2.1. The opportunity cost of producing one ton of steel in the United
States is:
a. 3 televisions b. 10 televisions c. 20 televisions d. 45 televisions
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14. Refer to Table 2.1. Mutually advantageous trade will occur between the United States
and the United Kingdom so long as one ton of steel trades for: a. At least 1 television, but no more than 2 televisions b. At least 2 televisions, but no more than 3 televisions c. At least 3 televisions, but no more than 4 televisions d. At least 4 televisions, but no more than 5 televisions 15. Refer to Table 2.1. The United Kingdom gains most from trade if:
a. 1 ton of steel trades for 2 televisions b. 1 ton of steel trades for 3 televisions c. 2 tons of steel trade for 4 televisions d. 2 tons of steel trade for 5 televisions
16. Concerning international trade restrictions, which of the following is false? Trade
restrictions:
a. Limit specialization and the division of labor
b. Reduce the volume of trade and the gains from trade
c. Cause nations to produce inside their production possibilities curves d. May result in a country producing some of the product of its comparative
disadvantage 17. If a production possibilities curve is bowed out (i.e., concave) in appearance, production
occurs under conditions of: a. Constant opportunity costs b. Increasing opportunity costs c. Decreasing opportunity costs d. Zero opportunity costs 18. Increasing opportunity costs suggest that:
a. Resources are not perfectly shiftable between the production of two goods b. Resources are fully shiftable between the production of two goods c. A country’s production possibilities curve appears as a straight line
d. A country’s production possibilities curve is bowed inward (i.e., convex) in
appearance 19. The trading-triangle concept is used to indicate a nation’s:
a. Exports, marginal rate of transformation, terms of trade b. Imports, terms of trade, marginal rate of transformation c. Marginal rate of transformation, imports, exports d. Terms of trade, exports, imports
20. Assuming increasing cost conditions, trade between two countries would not be likely if
they have:
a. Identical demand conditions but different supply conditions b. Identical supply conditions but different demand conditions c. Different supply conditions and different demand conditions d. Identical demand conditions and identical supply conditions
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Use the data in Table 2.2 to answer Questions 21 through 26.
Table 2.2. Output Possibilities for South Korea and Japan Output per Worker per Day Country Tons of Steel VCRs South Korea 80 40 Japan 20 20 21. Refer to Table 2.2. The opportunity cost of one VCR in Japan is:
a. 1 ton of steel b. 2 tons of steel c. 3 tons of steel d. 4 tons of steel 22. Refer to Table 2.2. The opportunity cost of one VCR in South Korea is:
a. ½ ton of steel b. 1 ton of steel c. 1½ tons of steel d. 2 tons of steel
23. Refer to Table 2.2. According to the principle of absolute advantage, Japan should:
a. Export steel b. Export VCRs
c. Export steel and VCRs
d. None of the above; there is no basis for gainful trade 24. Refer to Table 2.2. According to the principle of comparative advantage:
a. South Korea should export steel
b. South Korea should export steel and VCRs c. Japan should export steel
d. Japan should export steel and VCRs
25. Refer to Table 2.2. With international trade, what would be the maximum amount of steel
that South Korea would be willing to export to Japan in exchange for each VCR? a. ½ ton of steel b. 1 ton of steel c. 1½ tons of steel d. 2 tons of steel
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26. Refer to Table 2.2. With international trade, what would be the maximum number of
VCRs that Japan would be willing to export to South Korea in exchange for each ton of steel?
a. 1 VCR b. 2 VCRs c. 3 VCRs d. 4 VCRs 27. The earliest statement of the principle of comparative advantage is associated with:
a. Adam Smith b. David Ricardo c. Eli Heckscher d. Bertil Ohlin 28. If and Taiwan had identical labor costs but were subject to increasing costs
of production:
a. Trade would depend on differences in demand conditions b. Trade would depend on economies of large-scale production c. Trade would depend on the use of different currencies d. There would be no basis for gainful trade 29. If the international terms of trade settle at a level that is between each country’s
opportunity cost:
a. There is no basis for gainful trade for either country b. Both countries gain from trade c. Only one country gains from trade
d. One country gains and the other country loses from trade 30. International trade is based on the notion that:
a. Different currencies are an obstacle to international trade b. Goods are more mobile internationally than are resources c. Resources are more mobile internationally than are goods d. A country’s exports should always exceed its imports 31. Refer to Figure 2.1. The relative cost of steel in terms of aluminum is:
a. 4.0 tons b. 2.0 tons c. 0.5 tons d. 0.25 tons
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Figure 2.1. Production Possibilities Schedule
32. Refer to Figure 2.1. The relative cost of aluminum in terms of steel is:
a. 4.0 tons b. 2.0 tons c. 0.5 tons d. 0.25 tons 33. Refer to Figure 2.1. If the relative cost of steel were to rise, then the production
possibilities schedule would: a. Become steeper b. Become flatter
c. Shift inward in a parallel manner d. Shift outward in a parallel manner 34. Refer to Figure 2.1. If the relative cost of aluminum were to rise, then the production
possibilities schedule would: a. Become steeper b. Become flatter
c. Shift inward in a parallel manner d. Shift outward in a parallel manner 35. When a nation achieves autarky equilibrium:
a. Input price equals final product price b. Labor productivity equals the wage rate c. Imports equal exports
d. Production equals consumption
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36. When a nation is in autarky and maximizes its living standard, its consumption and
production points are:
a. Along the production possibilities schedule b. Above the production possibilities schedule c. Beneath the production possibilities schedule d. Any of the above 37. If Canada experiences increasing opportunity costs, its supply schedule of steel will be:
a. Downward-sloping b. Upward-sloping c. Horizontal d. Vertical 38. If Canada experiences constant opportunity costs, its supply schedule of steel will be:
a. Downward-sloping b. Upward-sloping c. Horizontal d. Vertical 39. The gains from international trade increase as:
a. A nation consumes inside of its production possibilities schedule b. A nation consumes along its production possibilities schedule
c. The international terms of trade rises above the nation’s autarky price d. The international terms of trade approaches the nation’s autarky price 40. In a two-country, two-product world, the statement ―Japan enjoys a comparative
advantage over France in steel relative to bicycles‖ is equivalent to:
a. France having a comparative advantage over Japan in bicycles relative to steel b. France having a comparative disadvantage against Japan in bicycles and steel c. Japan having a comparative advantage over France in steel and bicycles d. Japan having a comparative disadvantage against Japan in bicycles and steel 41. Ricardo’s theory of comparative advantage was of limited real-world validity because it
was founded on the:
a. Labor theory of value b. Capital theory of value c. Land theory of value
d. Entrepreneur theory of value
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42. Assume that labor is the only factor of production and that wages in the United States
equal $20 per hour while wages in the United Kingdom equal $10 per hour. Production costs would be lower in the United States than the United Kingdom if:
a. U.S. labor productivity equaled 40 units per hour while U.K. labor productivity
equaled 15 units per hour
b. U.S. labor productivity equaled 30 units per hour while U.K. labor productivity
equaled 20 units per hour
c. U.S. labor productivity equaled 20 units per hour while U.K. labor productivity
equaled 30 units per hour
d. U.S. labor productivity equaled 15 units per hour while U.K. labor productivity
equaled 25 units per hour 43. According to Ricardo, a country will have a comparative advantage in the product in
which its:
a. Labor productivity is relatively low b. Labor productivity is relatively high c. Labor mobility is relatively low d. Labor mobility is relatively high 44. The Ricardian model of comparative advantage is based on all of the following
assumptions except:
a. Only two nations and two products b. Product quality varies among nations c. Labor is the only factor of production d. Labor can move freely within a nation 45. The writings of G. D. A. MacDougall emphasized which of the following as an
explanation of a country’s competitive position? a. National income levels
b. Relative endowments of natural resources c. Domestic tastes and preferences
d. Labor compensation and productivity levels
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CHAPTER 3
INTERNATIONAL EQUILIBRIUM
MULTIPLE-CHOICE QUESTIONS
1. Which of the following is false concerning indifference curves?
a. They illustrate how the nation ranks alternative consumption bundles b. Higher curves refer to more satisfaction
c. They are negatively sloped, being bowed out away from the diagram’s origin d. They reflect the tastes and preferences of a consumer 2. The amount of one good that is just sufficient to compensate the consumer for the loss of
some amount of another good is referred to as: a. Absolute cost b. Comparative cost
c. Marginal rate of transformation d. Marginal rate of substitution 3. In autarky, the equilibrium relative price of one product in terms of another product for a
country is determined by the:
a. Production possibilities curve b. Community indifference curve c. Community indifference map
d. Production possibilities curve and community indifference map 4. In general, as we move downward along a country’s community indifference curve, the
marginal rate of substitution of one product for another product: a. Increases b. Decreases
c. Remains constant d. None of the above 5. The introduction of community indifference curves into our trading example focuses
attention on the nation’s: a. Income level b. Resource prices
c. Tastes and preferences d. Productivity level
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6. Introducing indifference curves into our trade model permits us to determine:
a. Where a nation chooses to locate along its production possibilities curve in autarky b. The precise location of a nation’s production possibilities curve c. Whether absolute cost or comparative cost conditions exist d. The currency price of one product in terms of another product 7. The marginal rate of substitution is measured by the absolute value of the slope of a (an):
a. Production possibilities curve b. Indifference curve
c. Production possibilities curve d. Demand curve 8. In the absence of trade, a nation is in equilibrium where a community indifference curve:
a. Lies above its production possibilities curve b. Is tangent to its production possibilities curve c. Intersects its production possibilities curve d. Lies below its production possibilities curve 9. The use of indifference curves helps us determine the point:
a. Along the terms-of-trade line a country will choose b. Where a country maximizes its resource productivity c. At which a country ceases to become competitive
d. Where the marginal rate of transformation approaches zero
10. With trade, a country will maximize its satisfaction when it:
a. Moves to the highest possible indifference curve
b. Forces the marginal rate of substitution to its lowest possible value c. Consumes more of both goods than it does in autarky
d. Finds its marginal rate of substitution exceeding its marginal rate of transformation 11. Trade between two nations would not be possible if they have:
a. Identical community indifference curves but different production possibilities curves b. Identical production possibilities curves but different community indifference curves c. Different production possibilities curves and different community indifference
curves
d. Identical production possibilities curves and identical community indifference
curves 12. Given a two-country and two-product world, the United States would enjoy all the
attainable gains from free trade with Canada if it: a. Trades at the U.S. rate of transformation
b. Trades at the Canadian rate of transformation
c. Specializes completely in the production of both goods d. Specializes partially in the production of both goods
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13. John Stuart Mill’s theory of reciprocal demand best applies when trading partners:
a. Are of equal size and importance in the market b. Produce under increasing cost conditions
c. Partially specialize in the production of commodities d. Have similar taste and preference levels 14. The equilibrium prices and quantities established after trade are fully determinate if we
know:
a. The location of all countries’ indifference curves
b. The shape of each country’s production possibilities curve c. The comparative costs of each trading partner
d. The strength of world supply and demand for each good 15. ―The equilibrium relative commodity price at which trade takes place is determined by
the conditions of demand and supply for each commodity in both nations. Other things being equal, the nation with the more intense demand for the other nation’s exported good will gain less from trade than the nation with the less intense demand.‖ This statement was first proposed by:
a. Alfred Marshall with offer curve analysis
b. John Stuart Mill with the theory of reciprocal demand c. Adam Smith with the theory of absolute advantage
d. David Ricardo with the theory of comparative advantage 16. Which of the following terms-of-trade concepts is calculated by dividing the change in a
country’s export price index by the change in its import price index between two points in time, multiplied by 100 to express the terms of trade in percentages? a. Commodity terms of trade b. Income terms of trade
c. Single factorial terms of trade d. Double factorial terms of trade 17. The best explanation of the gains from trade that David Ricardo could provide was to
describe only the outer limits within which the equilibrium terms of trade would fall. This is because Ricardo’s theory did not recognize how market prices are influenced by: a. Demand conditions b. Supply conditions c. Business expectations d. Profit patterns 18. The use of indifference curves helps us determine the point:
a. Along the production possibilities curve a country will choose b. At which a country maximizes its resource productivity c. At which a country ceases to become competitive
d. Where the marginal rate of transformation approaches zero
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19. Under free trade, Sweden enjoys all of the gains from trade with Holland if Sweden:
a. Trades at Holland’s rate of transformation b. Trades at Sweden’s rate of transformation
c. Specializes completely in the production of its export good d. Specializes partially in the production of its export good 20. Because the Ricardian trade theory recognized only how supply conditions influence
international prices, it could determine: a. The equilibrium terms of trade
b. The outer limits for the terms of trade
c. Where a country chooses to locate along its production possibilities curve d. Where a country chooses to locate along its trade triangle 21. The terms of trade is given by the prices:
a. Paid for all goods imported by the home country b. Received for all goods exported by the home country c. Received for exports and paid for imports
d. Of primary products as opposed to manufactured products Given the terms of trade data in Table 3.1, answer Questions 22 through 24.
Table 3.1. Terms of Trade Export Price Index Country 1990 2003 Mexico 100 220 Sweden 100 160 Spain 100 155 France 100 170 Denmark 100 120 Import Price Index 1990 2003 100 200 100 150 100 155 100 230 100 125
22. Referring to Table 3.1, which countries’ terms of trade improved between 1990 and 2003?
a. Mexico and Denmark b. Sweden and Denmark c. Sweden and Spain d. Mexico and Sweden 23. Referring to Table 3.1, which countries’ terms of trade worsened between 1990 and 2003?
a. Spain and Mexico b. Mexico and France c. France and Denmark d. Denmark and Sweden
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24. Referring to Table 3.1, which country’s terms of trade did not change between 1990 and
2003? a. Spain b. Sweden c. France d. Denmark 25. Given free trade, small nations tend to benefit the most from trade since they:
a. Are more productive than their large trading partners b. Are less productive than their large trading partners
c. Have demand preferences and income levels lower than their large trading partners d. Enjoy terms of trade lying near the opportunity costs of their large trading partners 26. A terms-of-trade index that equals 150 indicates that compared to the base year:
a. It requires a greater output of domestic goods to obtain the same amount of foreign
goods
b. It requires a lesser amount of domestic goods to obtain the same amount of foreign
goods
c. The price of exports has risen from $100 to $150 d. The price of imports has risen from $100 to $150 27. A term-of-trade index that equals 90 indicates that compared to the base year:
a. It requires a greater output of domestic goods to obtain the same amount of foreign
goods
b. It requires a lesser amount of domestic goods to obtain the same amount of foreign
goods
c. The price of exports has fallen from $100 to $90 d. The price of imports has fallen from $100 to $90 28. The theory of reciprocal demand does not well apply when one country:
a. Produces under constant cost conditions
b. Produces along its production possibilities curve
c. Is of minor economic importance in the world marketplace d. Partially specializes the production of its export good 29. The terms of trade is given by:
a. (Price of exports/price of imports) – 100 b. (Price of exports/price of imports) + 100 c. (Price of exports/price of imports) ÷ 100 d. (Price of exports/price of imports) × 100
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30. If Japan and France have identical production possibilities curves and identical
community indifference curves:
a. Japan will enjoy all the gains from trade b. France will enjoy all the gains from trade
c. Japan and France share equally in the gains from trade d. Gainful specialization and trade are not possible 31. A rise in the price of imports or a fall in the price of exports will:
a. Improve the terms of trade b. Worsen the terms of trade
c. Expand the production possibilities curve d. Contract the production possibilities curve 32. A fall in the price of imports or a rise in the price of exports will:
a. Improve the terms of trade b. Worsen the terms of trade
c. Expand the production possibilities curve d. Contract the production possibilities curve
33. Under free trade, Canada would not enjoy any gains from trade with Sweden if Canada:
a. Trades at the Canadian rate of transformation b. Trades at Sweden’s rate of transformation
c. Specializes completely in the production of its export good d. Specializes partially in the production of its export good The next six questions are based on trade data for Canada as illustrated in Figure 3.1. The figure assumes that Canada attains international trade equilibrium at point C.
Figure 3.1 Canadian Trade Possibilities
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34. Consider Figure 3.1. In the absence of trade, Canada would produce and consume:
a. 8 televisions and 16 refrigerators b. 12 televisions and 16 refrigerators c. 8 televisions and 12 refrigerators d. 12 televisions and 8 refrigerators 35. Refer to Figure 3.1. Canada has a comparative advantage in:
a. Televisions b. Refrigerators
c. Televisions and refrigerators
d. Neither televisions nor refrigerators 36. Consider Figure 3.1. With specialization, Canada produces:
a. 16 televisions
b. 12 televisions and 8 refrigerators c. 8 televisions and 16 refrigerators d. 24 refrigerators 37. Consider Figure 3.1. With trade, Canada consumes:
a. 12 televisions and 8 refrigerators b. 12 televisions and 16 refrigerators c. 8 televisions and 16 refrigerators d. 24 refrigerators 38. According to Figure 3.1, exports for Canada total:
a. 16 refrigerators b. 8 refrigerators c. 12 refrigerators d. 16 refrigerators 39. According to Figure 3.1, imports for Canada total:
a. 6 televisions b. 8 televisions c. 12 televisions d. 16 televisions
40. Concerning possible determinants of international trade, which are sources of
comparative advantage? Differences in: a. Methods of production b. Tastes and preferences c. Technological know-how d. All of the above
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41. Consider Figure 3.2. Given offer curves Brazil0 and Sweden0, the equilibrium terms of
trade equal _____; at this terms of trade, Sweden __________ A0 tons of aluminum and __________ S0 tons of steel. a. tt1, imports, exports b. tt1, exports, imports c. tt0, exports, imports d. tt0, imports, exports
Figure 3.2. Offer Curves of Sweden and Brazil
42. Consider Figure 3.2. Brazil’s offer curve would shift from Brazil0 to Brazil1 if there
would occur in Brazil a (an): a. Increased demand for steel
b. Increased demand for aluminum
c. No change in the demand for aluminum d. Decreased supply of steel 43. Consider Figure 3.2. Given Sweden’s offer curve Sweden0, suppose Brazil’s offer curve
shifts from Brazil0 to Brazil1. This shift leads to a (an):
a. Increase in the volume of trade and a worsening in Brazil’s terms of trade b. Increase in the volume of trade and an improvement in Brazil’s terms of trade c. Decrease in the volume of trade and an improvement in Brazil’s terms of trade d. Decrease in the volume of trade and a worsening in Brazil’s terms of trade
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44. A (an) __________ shows the quantity of imports that a nation desires to purchase at
various terms of trade and the quantity of exports that the nation will have to provide in order to obtain those imports at those prices. a. Indifference curve b. Offer curve
c. Production possibilities curve d. Demand curve 45. The equilibrium international terms of trade is given by the intersection of two nation’s:
a. Demand curves b. Indifference curves c. Offer curves
d. Production possibilities curves 46. Refer to Figure 3.3. Given offer curves Korea0 and Germany0, the equilibrium terms of
trade is denoted by _____. At this terms of trade, Germany __________ and __________. a. tt0, exports 25 tools, imports 37 radios b. tt0, imports 25 tools, exports 37 radios c. tt1, exports 20 tools, imports 35 radios d. tt1, imports 20 tools, exports 35 radios
Figure 3.3. Offer Curves of Korea and Germany
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47. Refer to Figure 3.3. Given offer curves Korea0 and Germany0, at terms of trade tt1 there is
a (an):
a. Excess supply of radios which causes Korea’s terms of trade to improve b. Excess supply of radios which causes Korea’s terms of trade to worsen c. Excess demand for radios which causes Korea’s terms of trade to improve d. Excess demand for radios which causes Korea’s terms of trade to worsen
CHAPTER 4
TRADE MODEL EXTENSIONS AND APPLICATIONS
MULTIPLE-CHOICE QUESTIONS
1. Which of the following suggests that a nation will export the commodity in the
production of which a great deal of its relatively abundant and cheap factor is used? a. The Linder theory
b. The product life cycle theory c. The MacDougall theory d. The Heckscher-Ohlin theory 2. According to Staffan Linder, trade between two countries tends to be most pronounced
when the countries:
a. Find their tastes and preferences to be quite harmonious
b. Experience economies of large-scale production over large output levels c. Face dissimilar relative abundances of the factors of production d. Find their per capita income levels to be approximately the same 3. Which of the following is a long-run theory, emphasizing changes in the trading position
of a nation over a number of years? a. Theory of factor endowments b. Comparative advantage theory c. Theory of the product cycle d. Overlapping demand theory
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Test Bank for International Economics, 9e
4. The Leontief paradox questioned the validity of the theory of:
a. Comparative advantage b. Factor endowments c. Overlapping demands d. Absolute advantage
5. Which of the following would least likely apply to the product life cycle theory?
a. Calculators and computers b. Coal and crude oil c. Home movie cameras d. Office machinery 6. Classical trade theory emphasized which of the following as an underlying explanation of
the basis for trade?
a. Productivities of labor inputs
b. Tastes and preferences among nations c. Changes in technologies over time d. Quantities of economic resources 7. Concerning the influence that transportation costs have on the location of industry, which
of the following industries has generally attempted to locate production facilities close to resource supplies? a. Autos b. Steel
c. Soft drinks
d. Extremely valuable electronics goods 8. Assume that Country A, in the absence of trade, finds itself relatively abundant in labor
and relatively scarce in land. The factor endowment theory reasons that with free trade, the internal distribution of national income in Country A will change in favor of: a. Labor b. Land
c. Both labor and land d. Neither labor nor land 9. When considering the effects of transportation costs, the conclusions of our trade model
must be modified. This is because transportation costs result in:
a. Lower trade volume, higher import prices, smaller gains from trade b. Lower trade volume, lower import prices, smaller gains from trade c. Higher trade volume, higher import prices, smaller gains from trade d. Higher trade volume, lower import prices, greater gains from trade 10. Most economists maintain that the major factor underlying wage stagnation in the United
States in the 1990s has been: a. Import competition b. Technological change
c. Rising real value of the minimum wage d. Increasing union membership
Chapter 1: The International Economy
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11. Assume the cost of transporting autos from Japan to Canada exceeds the pretrade price
difference for autos between Japan and Canada. Trade in autos is: a. Impossible b. Possible
c. Highly profitable d. Moderately profitable 12. Eli Heckscher and Bertil Ohlin are associated with the theory of comparative advantage
that stresses differences in:
a. Income levels among countries
b. Tastes and preferences among countries c. Resource endowments among countries d. Labor productivities among countries 13. is relatively abundant in labor, while Canada is relatively abundant in capital.
In both countries the production of shirts is relatively more labor intensive than the production of computers. According to the factor endowment theory, will have a (an):
a. Absolute advantage in the production of shirts and computers b. Absolute advantage in the production of computers c. Comparative advantage in the production of shirts
d. Comparative advantage in the production of computers 14. If Japanese workers receive lower wages in the production of autos than do American
workers:
a. Japan will have a comparative advantage in the production of autos b. Japan will have an absolute advantage in the production of autos c. Production costs will be lower in Japan than in the U.S.
d. Production costs could be lower in the U.S. if American labor productivity is higher
than the Japanese 15. Which trade theory suggests that a newly produced good, once exported, could ultimately
end up being imported as the technology is transferred to lower-cost nations? a. Factor endowment theory b. Product life cycle theory c. Overlapping demand theory d. Comparative advantage theory 16. A firm is said to enjoy economies of scale over the range of output for which the long-run
average cost is: a. Increasing b. Constant c. Decreasing
d. None of the above
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Test Bank for International Economics, 9e
17. A product will be internationally traded as long as the pretrade price differential between
the trading partners is:
a. Greater than the cost of transporting it between them b. Equal to the cost of transporting it between them c. Less than the cost of transporting it between them d. None of the above 18. Which of the following suggests that by widening the market’s size, international trade
can permit longer production runs for manufacturers, which leads to increasing efficiency? a. Economies of scale b. Diseconomies of scale c. Comparative cost theory d. Absolute cost theory 19. The Leontief paradox:
a. Was applied to the product life cycle theory
b. Suggested that the U.S. exports labor-intensive goods
c. Found that national income differences underlie world trade patterns d. Implied that diseconomies of scale occur at low output levels 20. Which of the following best applies to the theory of overlapping demands?
a. Manufactured goods b. Services
c. Primary products d. None of the above
21. The Heckscher-Ohlin theory explains comparative advantage as the result of differences
in countries’:
a. Economies of large-scale production b. Relative abundance of various resources c. Relative costs of labor d. Research and development 22. Boeing aircraft company was able to cover its production costs of the first ―jumbo jet‖ in
the 1970s because Boeing could market it to several foreign airlines in addition to domestic airlines. This illustrates:
a. How economies of scale make possible a larger variety of products in international
trade
b. A transfer of wealth from domestic consumers to domestic producers as the result of
trade
c. How a natural monopoly is forced to behave more competitively with international
trade
d. How a natural monopoly is forced to behave less competitively with international
trade
Chapter 1: The International Economy
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23. Which trade theory contends that a country that initially develops and exports a new
product may eventually become an importer of it and may no longer manufacture the product?
a. Theory of factor endowments b. Theory of overlapping demands c. Economies of scale theory d. Product life cycle theory 24. The theory of overlapping demands predicts that trade in manufactured goods is
unimportant for countries with very different: a. Tastes and preferences
b. Expectations of future interest rate levels c. Per-capita income levels d. Labor productivities 25. The trade model of the Swedish economists Heckscher and Ohlin maintains that:
a. Absolute advantage determines the distribution of the gains from trade b. Comparative advantage determines the distribution of the gains from trade c. The division of labor is limited by the size of the world market
d. A country exports goods for which its resource endowments are most suited 26. According to the factor endowment model, countries heavily endowed with land will:
a. Devote excessive amounts of resources to agricultural production b. Devote insufficient amounts of resources to agricultural production c. Export products that are land-intensive d. Import products that are land-intensive 27. For the United States, empirical studies indicate that over the past two decades the cost of
international transportation relative to the value of U.S. imports has: a. Increased b. Decreased c. Not changed
d. None of the above 28. Should international transportation costs decrease, the effect on international trade would
include:
a. An increase in the volume of trade b. A smaller gain from trade
c. A decline in the income of home producers
d. A decrease in the level of specialization in production. 29. That the division of labor is limited by the size of the market best applies to which
explanation of trade?
a. Factor endowment theory b. Product life cycle theory c. Economies of scale theory d. Overlapping demand theory
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Test Bank for International Economics, 9e
30. A larger variety of products results from international trade especially if:
a. International trade affords producers monopoly power b. National governments levy import tariffs and quotas c. Producing goods entails increasing costs d. Economies of scale exist for producers 31. With economies of scale and decreasing unit costs, a country has the incentive to:
a. Specialize completely in the product of its comparative advantage b. Specialize partially in the product of its comparative advantage
c. Specialize completely in the product of its comparative disadvantage d. Specialize partially in the product of its comparative disadvantage 32. Proponents of __________ maintain that government should enact policies that
encourage the development of emerging, ―sunrise‖ industries and hasten the phasing out of declining, ―sunset‖ industries. a. Product life cycle policy
b. Static comparative advantage policy c. Intraindustry trade policy d. Industrial policy 33. Legislation requiring domestic manufacturers to install pollution abatement equipment
tends to promote:
a. Higher production costs and an increase in output b. Higher production costs and a decrease in output c. Lower production costs and an increase in output d. Lower production costs and a decrease in output 34. Stringent environmental regulations (e.g., air quality standards) imposed on domestic
steel manufacturers tend to:
a. Enhance their competitiveness in the international market b. Detract from their competitiveness in the international market
c. Increase the profitability and productivity of domestic manufacturers
d. Reduce the market share of foreign firms selling steel in the domestic market 35. Among the determinants underlying a country’s international competitiveness in business
services (e.g., construction) are:
a. The potential scale economies afforded by a market’s size
b. Abundance of equipment including data processing facilities and computers c. Skills and capabilities of employees and their wage rates d. All of the above 36. The simultaneous import and export of computers by Germany is an example of:
a. Intraindustry trade b. Interindustry trade c. Perfect competition d. Imperfect competition
Chapter 1: The International Economy
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37. Linder’s theory of overlapping demand provides an explanation of:
a. Product life cycle theory b. Factor endowment model
c. Economies of large-scale production d. Intraindustry trade 38. Intraindustry trade can be explained in part by:
a. Adam Smith’s principle of absolute advantage b. Perfect competition in product markets c. Diseconomies of large scale production
d. Transportation costs between and within nations 39. The Leontief paradox provided:
a. Support for the principle of absolute advantage b. Support for the factor endowment model
c. Evidence against the factor endowment model
d. Evidence against the principle of absolute advantage
40. Which trade theory suggests that comparative advantage tends to shift from one nation to
another as a product matures? a. Interindustry trade theory b. Intraindustry trade theory c. Product life cycle theory d. Overlapping demand theory 41. Which trade theory is tantamount to a short-run version of the factor price equalization
theory?
a. Specific factors theory b. Product life cycle theory c. Economies of scale theory d. Overlapping demand theory 42. According to the specific factors trade theory:
a. Owners of factors specific to export industries suffer from trade, while owners of
factors specific to import-competing industries gain
b. Owners of factors specific to export industries gain from trade, while owners of
factors specific to import-competing industries suffer
c. Both owners of factors specific to export industries and owners of factors specific to
import-competing industries gain from trade
d. Both owners of factors specific to export industries and owners of factors specific to
import-competing industries suffer from trade
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Test Bank for International Economics, 9e
43. Which nation has sometimes been characterized as being a ―pollution haven‖ due to its
lenient environmental standards that encourage the production of pollution-intensive goods? a. Japan b. Canada c. Germany d. Mexico 44. During the 1980s through 1990s, Boeing Inc. criticized Airbus Industrie’s
competitiveness on the grounds that Airbus benefitted from: a. Import tariffs protecting Airbus in the European market b. Import quotas protecting Airbus in the European market c. Lenient environmental standards of European governments d. Production subsidies supplied by European governments
45. To justify the subsidies it has received from European governments, Airbus Industrie has
used all of the following arguments except:
a. Its subsidies have prevented U.S. aircraft firms from holding a worldwide monopoly b. U.S. aircraft firms have benefitted from military-sponsored programs of the U.S.
government
c. Airbus’ subsidies were totally repaid as the firm realized profits on its aircraft sales d. Without subsidies to Airbus, Europe would be dependent on the United States as a supplier of aircraf
CHAPTER 5 TARIFFS
MULTIPLE-CHOICE QUESTIONS
1. The imposition of tariffs on imports results in deadweight welfare losses for the home
economy. These losses consist of the:
a. Protective effect plus consumption effect b. Redistribution effect plus revenue effect c. Revenue effect plus protective effect
d. Consumption effect plus redistribution effect
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31
2. Suppose that the United States eliminates its tariff on steel imports, permitting foreign-produced steel to enter the U.S. market. Steel prices to U.S. consumers would be expected to:
a. Increase, and the foreign demand for U.S. exports would increase b. Decrease, and the foreign demand for U.S. exports would increase c. Increase, and the foreign demand for U.S. exports would decrease d. Decrease, and the foreign demand for U.S. exports would decrease 3. A $100 specific tariff provides home producers more protection from foreign competition
when:
a. The home market buys cheaper products rather than expensive products b. It is applied to a commodity with many grade variations
c. The home demand for a good is elastic with respect to price changes d. It is levied on manufactured goods rather than primary products 4. A lower tariff on imported aluminum would most likely benefit:
a. Foreign producers at the expense of domestic consumers b. Domestic manufacturers of aluminum c. Domestic consumers of aluminum
d. Workers in the domestic aluminum industry
5. When a government allows raw materials and other intermediate products to enter a
country duty free, its tariff policy generally results in a (an): a. Effective tariff rate less than the nominal tariff rate b. Nominal tariff rate less than the effective tariff rate c. Rise in both nominal and effective tariff rates d. Fall in both nominal and effective tariff rates 6. Of the many arguments in favor of tariffs, the one that has enjoyed the most significant
economic justification has been the: a. Infant industry argument
b. Cheap foreign labor argument c. Balance of payments argument d. Domestic living standard argument 7. The redistribution effect of an import tariff is the transfer of income from the domestic:
a. Producers to domestic buyers of the good b. Buyers to domestic producers of the good c. Buyers to the domestic government d. Government to the domestic buyers 8. Which of the following is true concerning a specific tariff?
a. It is exclusively used by the U.S. in its tariff schedules
b. It refers to a flat percentage duty applied to a good’s market value
c. It is plagued by problems associated with assessing import product values d. It affords less protection to home producers during eras of rising prices
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Test Bank for International Economics, 9e
9. The principal benefit of tariff protection goes to:
a. Domestic consumers of the good produced b. Domestic producers of the good produced c. Foreign producers of the good produced d. Foreign consumers of the good produced
10. Which of the following policies permits a specified quantity of goods to be imported at
one tariff rate and applies a higher tariff rate to imports above this quantity? a. Tariff quota b. Import tariff c. Specific tariff d. Ad valorem tariff 11. Assume the United States adopts a tariff quota on steel in which the quota is set at 2
million tons, the within-quota tariff rate equals 5 percent, and the over-quota tariff rate equals 10 percent. Suppose the U.S. imports 1 million tons of steel. The resulting revenue effect of the tariff quota would accrue to: a. The U.S. government only b. U.S. importing companies only c. Foreign exporting companies only
d. The U.S. government and either U.S. importers or foreign exporters 12. When the production of a commodity does not utilize imported inputs, the effective tariff
rate on the commodity:
a. Exceeds the nominal tariff rate on the commodity b. Equals the nominal tariff rate on the commodity c. Is less than the nominal tariff rate on the commodity d. None of the above 13. Developing nations often maintain that industrial countries permit raw materials to be
imported at very low tariff rates while maintaining high tariff rates on manufactured imports. Which of the following refers to the above statement? a. Tariff-quota effect b. Nominal tariff effect c. Tariff escalation effect d. Protective tariff effect 14. Should the home country be ―large‖ relative to the world, its imposition of a tariff on
imports would lead to an increase in domestic welfare if the terms-of-trade effect exceeds the sum of the:
a. Revenue effect plus redistribution effect b. Protective effect plus revenue effect
c. Consumption effect plus redistribution effect d. Protective effect plus consumption effect
Chapter 1: The International Economy
33
15. Should Canada impose a tariff on imports, one would expect Canada’s:
a. Terms of trade to improve and volume of trade to decrease b. Terms of trade to worsen and volume of trade to decrease c. Terms of trade to improve and volume of trade to increase d. Terms of trade to worsen and volume of trade to increase 16. A beggar-thy-neighbor policy is the imposition of:
a. Free trade to increase domestic productivity
b. Trade barriers to increase domestic demand and employment c. Import tariffs to curb domestic inflation
d. Revenue tariffs to make products cheaper for domestic consumers
17. A problem encountered when implementing an ―infant industry‖ tariff is that:
a. Domestic consumers will purchase the foreign good regardless of the tariff b. Political pressure may prevent the tariff’s removal when the industry matures c. Most industries require tariff protection when they are mature d. Labor unions will capture the protective effect in higher wages 18. Tariffs are not defended on the ground that they:
a. Improve the terms of trade of foreign nations b. Protect jobs and reduce unemployment
c. Promote growth and development of young industries
d. Prevent overdependence of a country on only a few industries 19. The deadweight loss of a tariff:
a. Is a social loss since it promotes inefficient production
b. Is a social loss since it reduces the revenue for the government
c. Is not a social loss because society as a whole doesn’t pay for the loss d. Is not a social loss since only business firms suffer revenue losses
20. Which of the following is a fixed percentage of the value of an imported product as it
enters the country? a. Specific tariff b. Ad valorem tariff c. Nominal tariff d. Effective tariff 21. A tax of 20 cents per unit of imported cheese would be an example of:
a. Compound tariff b. Effective tariff c. Ad valorem tariff d. Specific tariff 22. A tax of 15 percent per imported item would be an example of:
a. Ad valorem tariff b. Specific tariff c. Effective tariff d. Compound tariff
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Test Bank for International Economics, 9e
23. Which type of tariff is not used by the American government?
a. Import tariff b. Export tariff c. Specific tariff d. Ad valorem tariff
24. Which trade policy results in the government levying a ―two-tier‖ tariff on imported
goods?
a. Tariff quota b. Nominal tariff c. Effective tariff d. Revenue tariff 25. If we consider the impact on both consumers and producers, then protection of the steel
industry is:
a. In the interest of the United States as a whole, but not in the interest of the state of
Pennsylvania
b. In the interest of the United States as a whole and in the interest of the state of
Pennsylvania
c. Not in the interest of the United States as a whole, but it might be in the interest of
the state of Pennsylvania
d. Not in the interest of the United States as a whole, nor in the interest of the state of
Pennsylvania 26. If I purchase a stereo from South Korea, I obtain the stereo and South Korea obtains the
dollars. But if I purchase a stereo produced in the United States, I obtain the stereo and the dollars remain in America. This line of reasoning is:
a. Valid for stereos, but not for most products imported by the United States b. Valid for most products imported by the United States, but not for stereos c. Deceptive since Koreans eventually spend the dollars on U.S. goods
d. Deceptive since the dollars spent on a stereo built in the United States eventually
wind up overseas 27. The most vocal political pressure for tariffs is generally made by:
a. Consumers lobbying for export tariffs b. Consumers lobbying for import tariffs c. Producers lobbying for export tariffs d. Producers lobbying for import tariffs
Chapter 1: The International Economy
35
28. If we consider the interests of both consumers and producers, then a policy of tariff
reduction in the U.S. auto industry is:
a. In the interest of the United States as a whole, but not in the interest of auto-producing states
b. In the interest of the United States as a whole, and in the interest of auto-producing
states
c. Not in the interest of the United States as a whole, nor in the interest of auto-producing states
d. Not in the interest of the United States as a whole, but is in the interest of auto-producing states 29. Free traders point out that:
a. There is usually an efficiency gain from having tariffs b. There is usually an efficiency loss from having tariffs c. Producers lose from tariffs at the expense of consumers d. Producers lose from tariffs at the expense of the government 30. A decrease in the import tariff will result in:
a. An increase in imports but a decrease in domestic production b. A decrease in imports but an increase in domestic production c. An increase in price but a decrease in quantity purchased d. A decrease in price and a decrease in quantity purchased
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Test Bank for International Economics, 9e
Figure 5.1 illustrates the demand and supply schedules for pocket calculators in Mexico, a ―small‖ nation that is unable to affect the world price. Answer the next 11 questions on the basis of this figure.
Figure 5.1. Import Tariff Levied by a “Small” Country
31. Consider Figure 5.1. In the absence of trade, Mexico produces and consumes:
a. 10 calculators b. 40 calculators c. 60 calculators d. 80 calculators 32. Consider Figure 5.1. In the absence of trade, Mexico’s producer surplus and consumer
surplus respectively equal: a. $120, $240 b. $180, $180 c. $180, $320 d. $240, $240
Chapter 1: The International Economy
37
33. Consider Figure 5.1. With free trade, Mexico imports:
a. 40 calculators b. 60 calculators c. 80 calculators d. 100 calculators
34. Consider Figure 5.1. With free trade, the total value of Mexico’s imports equal:
a. $220 b. $260 c. $290 d. $300 35. Consider Figure 5.1. With free trade, Mexico’s producer surplus and consumer surplus
respectively equal: a. $5, $605 b. $25, $380 c. $45, $250 d. $85, $195 36. Consider Figure 5.1. With a per-unit tariff of $3, the quantity of imports decreases to:
a. 20 calculators b. 40 calculators c. 50 calculators d. 70 calculators 37. According to Figure 5.1, the loss in Mexican consumer surplus due to the tariff equals:
a. $225 b. $265 c. $285 d. $325 38. According to Figure 5.1, the tariff results in the Mexican government collecting:
a. $100 b. $120 c. $140 d. $160 39. According to Figure 5.1, Mexican manufacturers gain __________ because of the tariff.
a. $75 b. $85 c. $95 d. $105 40. According to Figure 5.1, the deadweight cost of the tariff totals:
a. $60 b. $70 c. $80 d. $90
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Test Bank for International Economics, 9e
41. Consider Figure 5.1. The tariff would be prohibitive (i.e., eliminate imports) if it equaled:
a. $2 b. $3 c. $4 d. $5 Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 5.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W. Answer the next six questions on the basis of this information.
Figure 5.2. Import Tariff Levied by a “Large” Country
42. Consider Figure 5.2. With free trade, the United States achieves market equilibrium at a
price of $_______. At this price, __________ tons of steel are produced by U.S. firms, __________ tons are bought by U.S. buyers, and __________ tons are imported. a. $450, 5 tons, 60 tons, 55 tons b. $475, 10 tons, 50 tons, 40 tons c. $525, 5 tons, 60 tons, 55 tons d. $630, 30 tons, 30 tons, 0 tons
Chapter 1: The International Economy
39
43. Consider Figure 5.2. Suppose the United States imposes a tariff of $100 on each ton of
steel imported. With the tariff, the price of steel rises to $_______ and imports fall to __________ tons. a. $550, 20 tons b. $550, 30 tons c. $575, 20 tons d. $575, 30 tons 44. Consider Figure 5.2. Of the $100 tariff, $_______ is passed on to the U.S. consumer via a
higher price, while $_______ is borne by the foreign exporter; the U.S. terms of trade __________.
a. $25, $75, improve b. $25, $75, worsen c. $75, $25, improve d. $75, $25, worsen 45. Refer to Figure 5.2. The tariff’s deadweight welfare loss to the United States totals:
a. $450 b. $550 c. $650 d. $750 46. According to Figure 5.2, the tariff’s terms-of-trade effect equals:
a. $300 b. $400 c. $500 d. $600
47. According to Figure 5.2, the tariff leads to the overall welfare of the United States:
a. Rising by $250 b. Rising by $500 c. Falling by $250 d. Falling by $500 48. Suppose that the production of $500,000 worth of steel in the United States requires
$100,000 worth of iron ore. The U.S. nominal tariff rates for importing these goods are 15 percent for steel and 5 percent for iron ore. Given this information, the effective rate of protection for the U.S. steel industry is approximately: a. 6 percent b. 12 percent c. 18 percent d. 24 percent
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Test Bank for International Economics, 9e
49. Suppose that the production of a $30,000 automobile in Canada requires $10,000 worth
of steel. The Canadian nominal tariff rates for importing these goods are 25 percent for automobiles and 10 percent for steel. Given this information, the effective rate of protection for the Canadian automobile industry is approximately: a. 15 percent b. 32 percent c. 48 percent d. 67 percent Answer the next two questions on the basis of the following information. Assume that the United States imports automobiles from South Korea at a price of $20,000 per vehicle and that these vehicles are subject to an import tariff of 20 percent. Also assume that U.S. components are used in the vehicles assembled by South Korea and that these components have a value of $10,000.
50. In the absence of the Offshore Assembly Provision of U.S. tariff policy, the price of an
imported vehicle to the U.S. consumer after the tariff has been levied is: a. $22,000 b. $23,000 c. $24,000 d. $25,000 51. Under the Offshore Assembly Provision of U.S. tariff policy, the price of an imported
vehicle to the U.S. consumer after the tariff has been levied is: a. $22,000 b. $23,000 c. $24,000 d. $25,000 52. Suppose an importer of steel is required to pay a tariff of $20 per ton plus 5 percent of the
value of steel. This is an example of a (an): a. Specific tariff b. Ad valorem tariff c. Compound tariff d. Tariff quota 53. A compound tariff is a combination of a (an):
a. Tariff quota and a two-tier tariff b. Revenue tariff and a protective tariff c. Import tariff and an export tariff
d. Specific tariff and an ad valorem tariff
Using the data of Table 5.1, answer Questions through 59.
Chapter 1: The International Economy
41
Table 5.1. Production Costs and Prices of Imported and Domestic VCRs Imported VCRs Domestic VCRs Component parts $150 Imported component parts$150 Assembly cost/profit 50 Assembly cost 50 Nominal tariff 25 Profit 25 Import price after tariff$225 Domestic price after tariff$225 . Consider Table 5.1. Prior to the tariff, the total price of domestically-produced VCRs is:
a. $150 b. $200 c. $225 d. $250 55. Consider Table 5.1. Prior to the tariff, the total price of imported VCRs is:
a. $150 b. $200 c. $225 d. $235 56. Consider Table 5.1. The nominal tariff rate on imported VCRs equals:
a. 11.1 percent b. 12.5 percent c. 16.7 percent d. 50.0 percent 57. Consider Table 5.1. Prior to the tariff, domestic value added equals:
a. $25 b. $50 c. $75 d. $100 58. Consider Table 5.1. After the tariff, domestic value added equals:
a. $25 b. $50 c. $75 d. $100 59. Consider Table 5.1. The effective tariff rate equals:
a. 11.1 percent b. 16.7 percent c. 50.0 percent d. 100.0 percent
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Test Bank for International Economics, 9e
60. If the domestic value added before an import tariff for a product is $500 and the domestic
value added after the tariff is $550, the effective rate of protection is: a. 5 percent b. 8 percent c. 10 percent d. 15 percent
CHAPTER 6
NONTARIFF TRADE BARRIERS
MULTIPLE-CHOICE QUESTIONS
1. The imposition of a tariff on imported steel for the home country results in:
a. Improving terms of trade and rising volume of trade b. Higher steel prices and falling steel consumption c. Lower profits for domestic steel companies
d. Higher unemployment for domestic steel workers
2. Which of the following refers to a market-sharing pact negotiated by trading partners to
moderate the intensity of international competition? a. Orderly marketing agreement b. Local content requirements c. Import quota
d. Trigger price mechanism 3. Suppose the United States and Japan enter into a voluntary export agreement in which
Japan imposes an export quota on its automakers. The largest share of the export quota’s ―revenue effect‖ would tend to be captured by: a. The U.S. government b. Japanese automakers
c. American auto consumers d. American autoworkers
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43
4. Suppose the government grants a subsidy to domestic producers of an import-competing
good. The subsidy tends to result in deadweight losses for the domestic economy in the form of the:
a. Consumption effect b. Redistribution effect c. Revenue effect d. Protective effect 5. Tariffs and quotas on imports tend to involve larger sacrifices in national welfare than
would occur under domestic subsidies. This is because, unlike domestic subsidies, import tariffs and quotas:
a. Permit less efficient home production b. Distort choices for domestic consumers
c. Result in higher tax rates for domestic residents
d. Redistribute revenue from domestic producers to consumers 6. Suppose the government grants a subsidy to its export firms that permits them to charge
lower prices on goods sold abroad. The export revenue of these firms would rise if the foreign demand is:
a. Elastic in response to the price reduction b. Inelastic in response to the price reduction c. Unit elastic in response to the price reduction d. None of the above 7. Because export subsidies tend to result in domestic exporters charging lower prices on
their goods sold overseas, the home country’s: a. Export revenues will decrease b. Export revenues will rise c. Terms of trade will worsen d. Terms of trade will improve 8. Which trade restriction stipulates the percentage of a product’s total value that must be
produced domestically in order for that product to be sold domestically? a. Import quota
b. Orderly marketing agreement c. Local content requirement
d. Government procurement policy 9. The imposition of a domestic content requirement by the United States would cause
consumer surplus for Americans to: a. Rise b. Fall
c. Remain unchanged d. None of the above
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Test Bank for International Economics, 9e
10. Domestic content legislation applied to autos would tend to:
a. Support wage levels of American autoworkers b. Lower auto prices for American autoworkers
c. Encourage American automakers to locate production overseas d. Increase profits of American auto companies
11. Compared to an import quota, an equivalent tariff may provide a less certain amount of
protection for home producers since:
a. A tariff has no deadweight loss in terms of production and consumption b. Foreign firms may absorb the tariff by offering exports at lower prices c. Tariffs are effective only if home demand is perfectly elastic
d. Quotas do not result in increases in the price of the imported good 12. Empirical studies show that because voluntary export quotas are typically administered
by exporting countries, foreign exporters tend to:
a. Raise their export prices, thus capturing much of the quota’s revenue effect b. Lower their export prices, thus losing much of the quota’s revenue effect c. Raise their export prices, thus selling more goods overseas d. Lower their export prices, thus selling fewer goods overseas 13. Concerning the restrictive impact of an import quota, assume there occurs an increase in
the domestic demand for the import product. As long as the quota falls short of what would be imported under free market conditions, the economy’s adjustment to the increase in demand would take the form of:
a. A decrease in domestic production of the import good b. An increase in the amount of the good being imported c. An increase in the domestic price of the import good d. A decrease in domestic consumption of the import good 14. Assume the U.S. has a competitive advantage in producing calculators, while the rest of
the world has a competitive advantage in steel. Suppose the U.S. and the rest of the world enter into an agreement to lower import quotas below existing levels on calculators and steel. Which of the following would least likely occur for the U.S.? Rising levels of: a. Consumer surplus for American buyers of steel b. Producer surplus for American steelmakers c. Production in the American calculator industry d. Producer surplus for American calculator producers 15. A firm that faces problems of falling sales and excess productive capacity might resort to
international dumping if it:
a. Can charge higher prices in markets that are elastic to price changes b. Earns revenues on foreign sales that at least cover variable costs
c. Can sell at that price where domestic and foreign demand elasticities equate d. Is able to force foreign prices below marginal production costs
Chapter 1: The International Economy
45
16. A producer successfully practicing international dumping would charge:
a. A relatively higher price in the more inelastic market b. A relatively higher price in the more elastic market
c. The same price in all markets, regardless of their elasticities d. Different prices in all markets, regardless of their elasticities
17. The practice of Canadian firms dumping their products in Sweden poses a problem for
economic policymakers since dumping tends to:
a. Favor Swedish consumers over Canadian consumers b. Favor Swedish producers over Canadian producers
c. Become widespread as firms operate at full productive capacity d. Result in firms charging prices above the total costs of production 18. The United Auto Workers union attempted to win the approval of legislation that would
moderate the practice of foreign sourcing on the part of American auto manufacturers. Which of the following best represents this legislation? a. Voluntary export quotas b. Trigger price mechanism c. Tariff quotas
d. Local content laws 19. A main factor behind the president’s decision to extend relief to steel firms in the form of
trigger prices was that:
a. Dumping complaints can be time consuming and expensive to implement b. The Tokyo Round outlawed the granting of subsidies to steel firms c. Trigger prices involve zero deadweight welfare loss for the economy d. Orderly marketing agreements were too costly to administer 20. If a tariff and an import quota lead to equivalent increases in the domestic price of steel,
then:
a. The quota results in efficiency reductions but the tariff does not b. The tariff results in efficiency reductions but the quota does not
c. They have different impacts on how much is produced and consumed d. They have different impacts on how income is distributed 21. If a tariff and an import quota lead to equivalent increases in the domestic price of steel,
then:
a. The quota results in efficiency reductions but the tariff does not b. The tariff results in efficiency reductions but the quota does not
c. They have identical impacts on how much is produced and consumed d. They have identical impacts on how income is distributed 22. From the perspective of the American public as a whole, export subsidies levied by
overseas governments on goods sold to the United States: a. Help more than they hurt b. Hurt more than they help
c. Are equivalent to an import quota d. Are equivalent to an export quota
46
Test Bank for International Economics, 9e
23. Export subsidies levied by foreign governments on products in which the United States
has a comparative disadvantage:
a. Lower the welfare of all Americans
b. Lead to increases in U.S. consumer surplus c. Encourage U.S. production of competing goods d. Encourage U.S. workers to demand higher wages 24. If import licenses are auctioned off to domestic importers in a competitive market, their
scarcity value (revenue effect) accrues to: a. Foreign corporations b. Foreign workers
c. Domestic corporations d. The domestic government 25. A specification of a maximum amount of a foreign produced good that will be allowed to
enter the country over a given time period is referred to as: a. A domestic subsidy b. An export subsidy c. An import quota d. An export quota 26. Import quotas tend to lead to all of the following except:
a. Domestic producers of the imported good being harmed b. Domestic consumers of the imported good being harmed c. Prices increasing in the importing country d. Prices falling in the exporting country
27. To maintain that South Koreans are dumping their VCRs in the United States is to
maintain that:
a. Koreans are selling VCRs in the United States below their production cost b. Koreans are selling VCRs in the United States above their production cost c. The cost of manufacturing VCRs in Korea is lower in Korea than in the United
States since wages are lower in Korea
d. The cost of manufacturing VCRs in Korea is higher in Korea than in the United
States since wages are higher in Korea 28. If the home country’s government grants a subsidy on a domestically produced good,
domestic producers tend to:
a. Capture the entire subsidy in the form of higher profits b. Increase their level of production
c. Reduce wages paid to domestic workers
d. Consider the subsidy as an increase in production cost
Chapter 1: The International Economy
47
29. For years the U.S. government levied quotas on inexpensive oil imported from the
Middle East. The quotas led to cost increases for U.S. consumers totaling $3 billion for oil products. An apparent justification for this policy was that: a. U.S. oil companies and workers deserved higher incomes b. U.S. oil was of superior quality and merited higher prices
c. One should not be too dependent on foreign suppliers of crucial resources d. The U.S. government needed the quota revenue to balance its budget 30. In certain industries, Japanese employers do not lay off workers. Therefore, they
sometimes have excess supplies of goods that they cannot sell on the home market without lowering prices. To hold down losses, they sell goods in overseas markets at prices well beneath those in Japan. This practice is best referred to as: a. Orderly marketing b. Trigger pricing
c. Domestic content pricing d. Dumping
48
Test Bank for International Economics, 9e
Figure 6.1 illustrates the steel market for Mexico, assumed to be a ―small‖ country that is
unable to affect the world price. Suppose the world price of steel is given and constant at $200 per ton. Now suppose the Mexican steel industry is able to obtain trade protection, as discussed in the questions below. Answer the next 12 questions on the basis of this information.
Figure 6.1. Alternative NTBs Levied by a “Small” Country
31. Consider Figure 6.1. With free trade, the quantity of steel imported by Mexico equals:
a. 2 tons b. 4 tons c. 6 tons d. 8 tons 32. Consider Figure 6.1. With free trade, Mexico’s consumer surplus and producer surplus
respectively equal: a. $2,000 and $1,200 b. $3,200 and $200 c. $3,600 and $800 d. $4,000 and $600
Chapter 1: The International Economy
49
33. Referring to Figure 6.1, suppose the Mexican government imposes an import quota equal
to 2 tons of steel. If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals: a. $200 b. $400 c. $600 d. $800 34. Referring to Figure 6.1, again consider the steel import quota of Question #33. If foreign
exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals: a. $200 b. $400 c. $600 d. $800 35. Referring to Figure 6.1, again consider the steel import quota of Question #33. If the
Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals: a. $200 b. $400 c. $600 d. $800 36. Consider Figure 6.1. Suppose instead that the Mexican government provides a subsidy of
$200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The quantity of imports equals: a. 1 ton b. 2 tons c. 3 tons d. 4 tons 37. Consider Figure 6.1. Referring to Question #36, the total cost of the subsidy to the
Mexican government equals: a. $200 b. $400 c. $600 d. $800 38. Consider Figure 6.1. As a result of the subsidy referred to in Question #36, Mexican steel
producers gain __________ of producer surplus. a. $200 b. $400 c. $600 d. $800
50
Test Bank for International Economics, 9e
39. Consider Figure 6.1. As a result of the subsidy referred to in Question #36, the welfare
loss to Mexico due to inefficient domestic production equals: a. $200 b. $400 c. $600 d. $800 40. Consider Figure 6.1. As the result of the subsidy referred to in Question #36, the overall
deadweight welfare loss to Mexico equals: a. $200 b. $400 c. $600 d. $800 41. Consider Figure 6.1. Suppose instead that the rest of the world voluntarily agrees to
reduce steel shipments to Mexico vis-à-vis an export quota equal to 2 tons. Assuming Mexican importers behave as competitive buyers while foreign exporters behave as monopoly sellers, the overall welfare loss of the quota to Mexico is: a. $200 b. $400 c. $600 d. $800 42. Consider Figure 6.1. Referring to the export quota of Question #41, suppose Mexican
importers behave as monopoly buyers while foreign exporters behave as competitive sellers. The overall welfare loss of the quota to Mexico is: a. $200 b. $400 c. $600 d. $800
Chapter 1: The International Economy
51
Figure 6.2 illustrates the revenue and cost conditions of ABC Inc., which sells calculators in Canada and France. On the basis of this information, answer the next four questions.
Figure 6.2. International Dumping
43. Consider Figure 6.2. In the absence of international dumping, ABC Inc. maximizes
profits by selling _______ calculators at a price of $_______; the firm realizes profits totaling $_______. a. 27, $5, $ b. 27, $5, $36 c. 24, $4, $46 d. 24, $4, $28 44. Referring to Figure 6.2, consider the quantity of calculators sold in the previous question.
Of this quantity, ABC Inc. sells _______ calculators in Canada and realizes revenues totaling $_______; the firm sells _______ calculators in France and realizes revenues totaling $_______. a. 15, $35, 9, $45 b. 15, $45, 9, $35 c. 21, $105, 6, $30 d. 21, $30, 6, $105 45. Consider Figure 6.2. With international dumping, ABC Inc. sells _______ calculators to
Canadian buyers at a price of $_______ and _______ calculators to French buyers at a price of $_______. a. 15, $4, 12, $7 b. 15, $7, 12, $4 c. 9, $5, 15, $6 d. 9, $6, 15, $5
52
Test Bank for International Economics, 9e
46. Consider Figure 6.2. Compared with the total revenue and total profit that ABC Inc.
realizes in the absence of dumping, with dumping the firm attains a: a. Fall in revenue of $18; fall in profits of $15 b. Fall in revenue of $18, fall in profits of $18 c. Rise in revenue of $18, rise in profits of $15 d. Rise in revenue of $18, rise in profits of $18 Figure 6.3 illustrates the apple market for Sweden, assumed to be a ―small‖ country that is unable to affect the world price. SSweden is the domestic supply and DSweden is the domestic demand. SSweden+Quota is Sweden’s supply schedule with an import quota. Answer the next 11 questions on the basis of this information.
Figure 6.3. Sweden’s Apple Market
47. Consider Figure 6.3. In the absence of trade, Sweden’s equilibrium price and quantity of
apples would be:
a. $0.60 and 22 pounds b. $0.60 and 14 pounds c. $1.00 and 18 pounds d. $1.40 and 14 pounds
Chapter 1: The International Economy
53
48. Consider Figure 6.3. Suppose the rest of the world can supply apples to Sweden at a price
of $0.60 per pound. With free trade, Sweden produces _______ pounds of apples and imports _______ pounds of apples. a. 10, 8 b. 10, 18 c. 6, 22 d. 6, 16 49. Consider Figure 6.3. At the free-trade price of $0.60 per pound, Sweden’s consumer
surplus totals $_______ and producer surplus totals $_______. a. $10.80, $2.40 b. $14.60, $3.90 c. $24.20, $1.80 d. $32.40, $2.30 50. Consider Figure 6.3. If SSweden+Quota represents the supply schedule after a quota is levied,
Sweden’s imports will equal: a. 6 apples b. 8 apples c. 10 apples d. 12 apples 51. Consider Figure 6.3. After the quota is levied, the price of apples in Sweden will equal:
a. $0.60 per pound b. $1.00 per pound c. $1.40 per pound d. $1.80 per pound 52. Consider Figure 6.3. As a result of the quota, Sweden’s consumer surplus:
a. Increases by $6 b. Increases by $8 c. Decreases by $6 d. Decreases by $8 53. Consider Figure 6.3. The quota leads to a deadweight welfare loss for Sweden of an
amount equaling: a. $0.80 b. $1.60 c. $2.40 d. $3.20 . Consider Figure 6.3. The quota’s revenue effect equals:
a. $1.60 b. $2.40 c. $3.20 d. $4.00
Test Bank for International Economics, 9e
55. Consider Figure 6.3. Assume that Swedish import companies behave as competitive
buyers while foreign export companies behave as a monopoly seller. Compared to free trade, Sweden’s import quota results in domestic welfare: a. Gains totaling $3.20 b. Gains totaling $4.80 c. Losses totaling $3.20 d. Losses totaling $4.80 56. Consider Figure 6.3. Assume that Swedish import companies behave as a monopoly
buyer while foreign export companies behave as competitive sellers. Compared to free trade, Sweden’s import quota results in domestic welfare: a. Gains totaling $1.60 b. Gains totaling $3.20 c. Losses totaling $1.60 d. Losses totaling $3.20 57. Consider Figure 6.3. If the Swedish government auctions import licenses to the highest
bidder in a competitive market, it could realize revenues of up to: a. $3.20 b. $4.00 c. $4.80 d. $5.60 Figure 6.4 illustrates the calculator market for Venezuela, assumed to be a ―small‖ country that is unable to affect the world price. SVenezuela is the domestic supply schedule and DVenezuela is the domestic demand schedule. Answer the next five questions on the basis of this information.
Chapter 1: The International Economy
55
Figure 6.4. Venezuelan Calculator Market
58. Consider Figure 6.4. Suppose the rest of the world supplies calculators to Venezuela at a
price of $4 each. With free trade, Venezuelan imports total: a. 8 calculators b. 16 calculators c. 20 calculators d. 24 calculators 59. Consider Figure 6.4. Assume the Venezuelan government grants its manufacturers a
production subsidy of $4 per calculator. After the subsidy is granted, Venezuelan imports total:
a. 8 calculators b. 12 calculators c. 16 calculators d. 20 calculators 60. Consider Figure 6.4. The cost of the production subsidy to the Venezuelan government
totals: a. $32 b. $40 c. $48 d. $
56
Test Bank for International Economics, 9e
61. Consider Figure 6.4. The increase in Venezuelan producer surplus under the production
subsidy totals: a. $16 b. $20 c. $24 d. $32 62. Consider Figure 6.4. The production subsidy results in an overall welfare loss for
Venezuela totaling: a. $8 b. $12 c. $16 d. $20
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