Exam_2___Key_ - Name_ PID_ EC 340 Exam 2 April 7, 2011...

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Name_______________________ PID_________________________ EC 340 Exam 2 April 7, 2011 Instructions Do not open the exam until instructed to do so. Answer all 48 questions, each has equal weight. Circle the letter of the alternative that best answers the question. You may NOT use calculator, notes, book, or any outside source of information.
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1 Use the graph to the right along with the following information to answer questions 1 – 5. Suppose that Thailand is a small importer of rice. The world (free trade) price of rice is $3 per pound. Thailand levies a $2 per pound import tariff. 1. In the tariff-distorted equilibrium, Thai producers of rice will be able to sell their rice for $6 per pound. a. False. 2. The import tariff reduces the quantity of rice that Thailand imports. Relative to the free trade quantity, what is the size of the reduction in imports due to the tariff? That is, what is the difference between the free-trade quantity of imports and the tariff-distorted quantity of imports? a. The quantity of imports falls by 600. 3. Relative to free trade, how does the tariff affect total consumer surplus? a. Consumer surplus falls by $1,600.
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2 4. What is the size of the total deadweight loss created by the import tariff? a. $600. 5. What is the net change in welfare of the Thai economy (relative to free trade) caused by this tariff? a. Thai welfare falls by $600. 6. In general, an import tariff increases the welfare of the importing country if the amount of tariff revenue that is collected is larger than the deadweight loss that is created by the tariff. a. False.
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3 The diagram to the right shows the U.S. market for orange juice. Assume that the U.S. is a large country in the world market for orange juice, that the free trade price of orange juice is $4 per gallon, and the U.S. levies an import tariff of $3 per gallon. Further suppose that this tariff raises the price of orange juice in the U.S. to $5 per gallon. Use this information to answer questions 7—11. 7. How much orange juice does the United States import in the tariff-distorted equilibrium? a. The United States imports 300 gallons of orange juice. 8. How much revenue does the tariff generate for the U.S. government? a. $900. 9. What is the size of the U.S. terms of trade gain due to the import tariff? a. $600. 10.
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This note was uploaded on 11/11/2011 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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Exam_2___Key_ - Name_ PID_ EC 340 Exam 2 April 7, 2011...

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