Chap015EndofChapterproblems - Chapter 15 - Arguments for...

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Chapter 15 - Arguments for Interventionist Trade Policies CHAPTER 15 ARGUMENTS FOR INTERVENTIONIST TRADE POLICIES Answers to End-of Chapter Questions and Problems 1. Consider Figure 2 in the text. For a given tariff t and a given starting point, the transfer of foreign profit will be less if demand is more elastic, since distance c 1 c 2 will be the same but the new quantity of imports (0q 2 ) will be smaller. Other things equal, this would diminish the size of any home country welfare improvement because of the tariff. The loss in consumer surplus will also be smaller and, at the limit (perfectly elastic demand), equal to zero. However, since greater elasticity reduces both the transfer of profit and the loss in consumer surplus, it is not possible to determine any general relationship of demand elasticity to the net welfare gain of the home country from the tariff. 2. No, Krugman’s results would not follow. Turn to Figure 9 in the text. In Figure 9(a), the MM curve would slope upward. Protection would cause QQ to shift to the right and would lead to an increase in marginal cost. In Figure 9(b) the result would be a shift of home firm reaction function HH to the left and, with no change in foreign firm reaction function FF, the home firm’s sales in the export market would fall and the foreign firm’s sales would rise. If the foreign firm’s counterpart schedule to MM also sloped upward, the home protection would also lead to an upward shift in FF, which would reinforce these export market share results. 3. No. The reduced costs per unit and ultimately lower consumer prices can then potentially be realized (if they have not already been realized) by the foreign producer as that producer sells to the domestic market (and other markets) under a free-trade regime. Protection for the home firm would achieve no greater cost reductions than would free trade. In fact, protection could reduce world welfare by generating excess capacity in the industry for the
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This note was uploaded on 10/24/2010 for the course ECON 460 taught by Professor Staff during the Fall '08 term at UNC.

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Chap015EndofChapterproblems - Chapter 15 - Arguments for...

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