(a) Suppose that country A wishes to restrict its imports of good X to 900 units

Question

(a) Suppose that country A wishes to restrict its imports of good X to 900 units per

month, which is a reduction from the current quantity of imports. Assume that A also produces good X domestically. In this context, illustrate and explain why the following statement is either TRUE or FALSE.

“The reduction in imports to 900 units per month will have identical

effects on product price in A, quantity produced in A, and welfare in A

whether the reduction is accomplished by the imposition of an import

tariff by country A or by country A’s officials persuading foreign

governments to ‘voluntarily’ restrict their exports to A to 900 units per

month.”

(b) Suppose that country A wishes to expand its home production of good Y (as well as employment in country A’s Y industry) by 10 percent, and country A is an importer of good Y.

In this context, illustrate and explain why the following statement is either TRUE or FALSE.

“The 10 percent increase in home output and employment in the Y

industry will be associated with identical effects on product price,

quantity of imports of good Y, and welfare in country A whether the 10

percent increase is accomplished by the imposition of an import tariff or

by the granting of a subsidy for production and employment to home

producers of good Y.”

Explanation / Answer

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