Ch. 10 Problems

Ch. 10 Problems - Chapter 10 Problems 1, 5 and additional...

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Chapter 10 Problems 1, 5 and additional I-IV.
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Problem 1 with Answer • A “small” country is one with no power to affect the world prices of commodities. Redraw Figures 10.5 and 10.6 for such a country. • For a small country, an increase in tariff rates will reduce import demand from M to M . The world relative price of imported food does not fall. Thus the level of imports of food falls by greater amount than in the large country case. This is a movement from point A to point C above (versus A to B in the large country case). The optimal tariff rate is zero, as real incomes are monotonically falling as tariff rates increase.
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Problem 1 Answer
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Problem 5 • In the text it was assumed that the government redistributes tariff proceeds back to the private sector. Instead, suppose the government spends the tariff revenues in a manner that differs from that of the private citizens. Consider two extreme forms of public spending: a. The tariff revenue is spent only on clothing, the export good. b. The tariff revenue is allocated only to buy food. Which scheme is likely to be favored by the home producers of food? What might happen to terms of trade in case b?
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Problem 5 Answer • a. If all the tariff revenue is spent on the
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This document was uploaded on 02/10/2012.

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Ch. 10 Problems - Chapter 10 Problems 1, 5 and additional...

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