1. a Refer to the diagram, where S d and D d are the domestic supply and demand
ID: 1111977 • Letter: 1
Question
1. a
Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With a PcPt per-unit tariff, the quantities sold by foreign and domestic producers, respectively, will be
Multiple Choice
a. xv and xz.
b. wy and w.
c. x and xz.
d. xz and x.
1.b
Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With a per-unit tariff in the amount PcPt, price and total quantity sold will be
Multiple Choice
a. Pt and y.
b. Pa and x.
c. Pt and x.
d. Pc and z.
2.a . The accompanying tables give production possibilities data for Gamma and Sigma. All data are in tons.
Gamma's production possibilities
Sigma's production possibilities
What are the limits of the terms of trade between Gamma and Sigma?
Multiple Choice
a. 1 tea = 1 pot to 1 tea = 3 pots
b.1 tea = 2 pots to 1 tea = 6 pots
c. 1 tea = 2 pots to 1 tea = 3.5 pots
d. 1 tea = 3 pots to 1 tea = 6 pot
2.b. Basis of the above table
a.Sigma should export tea to Gamma, and Gamma should export pots to Sigma.
b. Gamma should export both tea and pots to Sigma.
c. Gamma should export tea to Sigma, and Sigma should export pots to Gamma.
d. Gamma should export tea to Sigma, but it will not be profitable for the two nations to exchange pots.
3.
The accompanying table gives domestic supply and demand schedules for a product. Suppose that the world price of the product is $1.
If the economy was opened to free trade and the world price of $1 prevailed, the price and quantity sold of this product would be
Multiple Choice
a.$1 and 1 unit.
b.$1 and 16 units.
c.$3 and 7 units.
d.$2 and 11 units.
A B C D E Tea 120 90 60 30 0 Pots 0 30 60 90 120 0 VWXy.z QuantityExplanation / Answer
(1-a) Option (b)
With tariff, relevant price is Pt at which domestic production = w and Domestic demand = y
Import = Production by foreign firms = wy
(1-b) Option (a)
With tariff, relevant price is Pt at which domestic production = w and Domestic demand = y
Import equals wy, therefore total quantity sold equals domestic demand equals Import plus domestic production.
(2-a) Option (a)
First we compute Opportunity cost (OC) as follows.
For Gamma,
OC of Tea = 120/120 = 1 Pot
OC of Pot = 120/120 = 1 Tea
For Sigma,
OC of Tea = 120/40 = 3 Pots
OC of Pot = 40/120 = 0.33 Tea
Trade is mutually beneficial if Terms of Trade (ToT) lies between OC in both countries. So, acceptable ToT is:
1 Tea = 1 Pot (OC in Gamma) to 1 Tea = 3 Pots (OC in Sigma)
(2-b) Option (c)
As per OC computed above,
Gamma can produce Tea at a lower OC than Sigma can (1 < 3), so Gamma has comparative advantage in Tea and should specialize in and export Tea to Sigma.
Sigma can produce Pot at a lower OC than Gamma can (0.33 < 1), so Sigma has comparative advantage in Pot and should specialize in and export Pots to Gamma.
NOTE: As per Chegg answering guideline, first 4 questions are answered.
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