Deck 15: Arguments for Interventionist Trade Policies

Question 1

The following diagram shows a "reaction function" graph for two firms selling in an export market, where HH is the home firm's reaction function and FF is the foreign firm's reaction function. Reaction function HH reflects the fact that, if the foreign firm increases its quantity sold in this market, then the home firm will __________ its sales level in the market; reaction function FF reflects the fact that, if the home firm increases its quantity sold in this market, the foreign firm will __________ its sales level in the market.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Answer 1

A

Question 2

Would it be possible for the infant industry argument to be applicable to a perfectly-competitive industry? Why or why not?

Answer 2

not answered

Question 3

Why might a foreign export subsidy decrease welfare in the foreign country? Why might the foreign country provide such a subsidy despite the adverse welfare effect?

Answer 3

not answered

Question 4

In the situation in the diagram in Question #14 above, the loss of consumer surplus for home consumers because of the imposition of the tariff is __________.

A) $4
B) $56
C) $121
D) $224

Question 5

In the model relating R&D spending to output and output to R&D spending, suppose that, for whatever autonomous reason, the home firm desires to spend more on R&D at each level of output. In this model, what does this greater R&D spending by the home firm do to R&D
spending by the foreign firm? Why? Does this result conform to your expectation of foreign firms' reactions in practice to increased R&D spending by home firms? Explain.

Question 6

Why do you suppose that "reaction functions" are not used in analyzing the market structure of perfect competition (or even monopolistic competition)? If you were to draw reaction functions for any home firm and any foreign firm engaged in perfect competition, what would the functions look like?

Question 7

How would you respond to an argument to impose a tariff on imports arriving from a particular country in order to improve the balance of trade with that particular country? Do the criticisms of the tariff to improve the overall trade balance with all partners apply in this bilateral context? Why or why not? Are there additional considerations to be taken into account? Explain.

Question 8

A tariff placed upon a product in order to offset a foreign export subsidy is called

A) an antidumping duty.
B) a countervailing duty.
C) a predatory duty.
D) a specific duty.

Question 9

In the situation of the "tariff to extract foreign monopoly profit," do you think that the existence of a home producer of the good would strengthen or weaken the case for protection from the standpoint of the impact on home country welfare? Explain.

Question 10

It is noted in the text that the infant industry argument is more frequently used in developing countries than in developed countries. Why might this be the case? Does this necessarily have to be the case?

Question 11

In a two-country world, the terms-of-trade impact of a tariff will definitely improve the welfare of the tariff-imposing country (assuming no retaliation) if the tariff-imposing country

A) is a small country.
B) already has a tariff rate that is greater than the "optimum" tariff rate.
C) is situated in the "elastic" portion of its trading partner's offer curve.
D) is situated in the "inelastic" portion of its trading partner's offer curve.

Question 12

In the "reaction function" diagram of Question #18 above, if the firms are at point A and if both firms are seeking to maximize profit, the foreign firm wants to __________ its sales in this market, and the home firm __________its sales in this market.

A) decrease; also wants to decrease
B) decrease; wants to increase
C) increase; wants to decrease
D) increase; also wants to increase

Question 13

Remembering micro theory, why can it be assumed that home demand for the product of a foreign monopoly supplier (at the initial as well as the post-tariff point) is elastic? Even if the net welfare impact of the "tariff to extract foreign monopoly profit" is uncertain, why is it certain that home consumers will incur less total spending on the good after the imposition of the tariff than before the imposition of the tariff?

Question 14

In the case of the economist's definition of "dumping," an exporting firm is selling its product at a __________ price in the importing country than in the exporter's home country, and this suggests that demand for the exporter's product is __________ in the exporting country than in the importing country.

A) higher; more elastic
B) higher; less elastic
C) lower; less elastic
D) lower; more elastic

Question 15

(a) Assume that there are only two firms in an industry - a home firm and a foreign firm - and that the firms are competing in third-country markets. (You can have them competing in each other's domestic markets if you wish.) Explain a "reaction function diagram" for the two firms, including the definition of a "reaction function" in this context and a brief discussion of why the reaction functions slope as they do (although you do not need to derive the functions formally). Then use a reaction function diagram (possibly along with other diagrams) to explain how a "strategic trade policy" action by the home firm's government can potentially enhance the home firm's market share in third-country markets.
(b) Briefly explain, in a two-country setting, how tariff reaction functions of the two governments can be constructed. Then, in a broader context, briefly indicate why this type of "game" can lead to a need for multilateral trade negotiations (such as those sponsored by GATT/WTO).

Question 16

In the "reaction function" diagram of Question #18 above, if economies of scale exist for both firms, then protection instituted in the home market to keep out the foreign firm's product will, other things equal, cause HH to shift to the __________.

A) left (or downward) and also will cause FF to shift to the left (or downward)
B) left (or downward) and will cause FF to shift to the right (or upward)
C) right (or upward) and also will cause FF to shift to the right (or upward)
D) right (or upward) and will cause FF to shift to the left (or downward)

Question 17

In the situation in the diagram in Question #14 above, the amount of former foreign monopoly profit that has been transferred as revenue to the home country's government because of the imposition of the tariff is __________.

A) $52
B) $104
C) $120
D) $390

Question 18

Illustrate and explain how a country could attain its optimum tariff position (optimum terms of trade) on the foreign offer curve by using an import quota rather than a tariff. Could this position also be attained by negotiation of a "voluntary" export restraint (VER) with the foreign country rather than by the use of a tariff? Why or why not?

Question 19

The following diagram shows the demand and marginal revenue curves facing a foreign monopoly supplier of a good to the home country, as well as the firm's horizontal marginal cost curve when there is no tariff by the home country (MC) and the marginal cost curve when a specific tariff is imposed by the home country (MC + T). (Assume that average cost (AC) equals marginal cost.) In this situation, the price to home country consumers after the tariff has been imposed is __________.

A) $10
B) $14
C) $25
D) 27

Question 20

Suppose that a relatively capital-abundant country is exporting the capital-intensive good and importing the labor-intensive good, but that the "specific-factors" model of Chapter 8 applies rather than the Heckscher-Ohlin model. Assess the effect on the return to labor of the imposition of a tariff on the labor-intensive good.

Question 21

The Krugman economies-of-scale "strategic trade policy" model stresses that protection given to a home firm will, other things equal, __________ the marginal cost of producing each level of home output and will __________ the marginal cost of producing each level of foreign output.

A) decrease; also decrease
B) decrease; increase
C) increase; also increase
D) increase; decrease

Question 22

The "optimum tariff rate" for a country is that rate which, assuming no retaliation,

A) maximizes the country's terms of trade.
B) maximizes the country's quantity of imports.
C) maximizes the country's balance of trade
D) maximizes the country's welfare.

Question 23

The macroeconomic interpretation of a trade deficit for a country utilizes which one of the following expressions (where Y = national income, C = consumption, I = investment, G = government spending on goods and services, X = exports, and M = imports)?

A) Y + (C + I + G) = (X - M)
B) (C + I + G) - Y = (X - M)
C) (C + I) - G - Y = (M - X)
D) Y - (C + I + G) = (X - M)

Question 24

In the game-theoretic analysis of tariff reaction functions of two governments, suppose that the equilibrium position has been attained (i.e., the countries are located at the intersection of their respective tariff reaction functions). If, from this equilibrium position, one country reduces its tariff rate while the other country does not change its tariff rate, the result, other things equal, is that the country that has reduced its tariff will experience __________.

A) an increase in its welfare
B) no change in its welfare.
C) a decrease in its welfare.
D) an increase, no change, or a decrease in its welfare - cannot be determined without more information.

Question 25

The general policy rule that states that the appropriate policies for alleviating a problem are those policies aimed directly at the source of the problem is called

A) the specificity principle.
B) the "beggar-my-neighbor" rule.
C) the "opportunity cost" principle.
D) the law of diminishing returns.

Question 26

In the following diagram, offer curve 0A₀ of country A is the free-trade offer curve, and the other four offer curves represent A's offer curves under four different tariff rates. Of these four other curves, only one of them can possibly be an offer curve which is associated with A's "optimum tariff." Which one?

A) 0A₁
B) 0A₂
C) 0A₃
D) 0A₄

Question 27

If tariffs are used in an attempt to improve country A's balance of trade, and if exchange rates are flexible, the imposition of the tariffs will cause __________ in the value of A's currency relative to other currencies and, as a consequence, A's exports will __________.

A) a decrease; decrease
B) a decrease; increase
C) an increase; decrease
D) an increase; increase

Question 28

The diagram below shows the demand curve (D) facing a foreign monopoly
Supplier of a good to home country I, the ssociated marginal revenue curve
(MR), and the foreign monopolist's marginal cost curve (MC), which equals the Average cost curve (AC). If country I places a tariff of the amount T on the Import of the foreign firm's product, the MC curve shifts vertically upward by the Amount of the tariff to (MC + T), which is also (AC + T). Given this situation,Which one of the following statements is TRUE?

A) The price of the product when there is no tariff is P₂.
B) The imposition of the tariff must lead to a net decrease in welfare in country I.
C) The imposition of the tariff leads to a net increase in welfare in country I if
Area C₁C₂FG exceeds area P₁P₂AB.
D) The imposition of the tariff leads to a net decrease in welfare in country I if
Area P₁P₂AB exceeds area C₁C₂HJ.

Question 29

In world of two "large" countries, if one country imposes a tariff, the welfare of the Tariff-imposing country will definitely improve (assuming no retaliation) if, the tariff-Imposing country

A) is trading, both before and after the imposition of the tariff, in the "elastic" portion of Its trading partner's offer curve.
B) is trading, both before and after the imposition of the tariff, in the "inelastic" portion Of its trading partner's offer curve.
C) is putting the new tariff on top of an already existing tariff rate that is greater than the "optimum" tariff rate.
D) puts on a prohibitive tariff.

Question 30

The argument that a tariff can provide temporary protection to an industry so that the industry can expand, realize economies of scale, and eventually become an export industry is known as the

A) antidumping argument.
B) national defense argument.
C) infant industry argument.
D) terms of trade argument.

Question 31

If, in a tariff game between two governments, both countries are on their tariff reaction functions, then each country __________ maximizing its welfare given the tariff of the other country. In this situation, there __________ incentive for each country to reduce its tariff unilaterally.

A) is; is an
B) is; is no
C) is not; is an
D) is not; is

Question 32

In the "payoff matrix" in Question #22 above, Firm H __________ a "dominant strategy" and Firm F __________ a "dominant strategy."

A) has; also has
B) has; does not have
C) does not have; has
D) does not have; also does not have

Question 33

Given the following "payoff matrix" for two interdependent firms in duopoly, where the figure in the lower left of each box shows Firm H's profit and the figure in the upper right of each box shows Firm F's profit:

In this situation Firm F will __________.

A) always produce
B) never produce
C) produce only if its cost of production is less than $120
D) never produce if its cost of production exceeds $10

Question 34

Starting from the "payoff matrix" situation in Question #22 above, suppose that a subsidy of $40 is now given to Firm H. Other things equal, with this subsidy, Firm H will __________.

A) always produce
B) never produce
C) only produce if Firm F does not produce
D) only produce if Firm F produces

Question 35

The existence of which type of dumping most likely constitutes the weakest argument for the imposition of an antidumping duty?

A) predatory dumping
B) persistent dumping
C) sporadic dumping
D) none of the above - predatory, persistent, and sporadic dumping all generate Equivalent-strength arguments for the imposition of an antidumping duty

Question 36

The macroeconomic view of a trade deficit implies that, other things equal, the imposition of a tariff will reduce the country's trade deficit

A) because imports will be reduced and exports cannot possibly change.
B) only if the tariff has no impact on the country's spending or income.
C) only if the tariff leads to increased income in the country relative to the country's Spending.
D) only if the tariff leads to increased spending by the country relative to the country's Income.

Question 37

If the United States government imposes a "countervailing duty," this duty is being imposed to offset

A) a foreign subsidy to a good exported to the United States.
B) a foreign tariff on U.S. exports of a good.
C) a foreign "voluntary" export restraint (VER) on a good exported to the United States.
D) a foreign import quota on U.S. exports of a good.