Econ 102 #2 Midterm

Question 1

What are the arguments in favor of trade restrictions, and what are the counterarguments?

Answer 1

Arguments mentioned in the text include the jobs argument, the national security argument, the infant industry argument, the unfair competition argument, and the protection-as-a-bargaining-chip argument

Question 2

List four benefits of international trade.

Answer 2

Increased variety of goods; lower costs through economies of scale; increased competition; and enhanced flow of ideas

Question 3

How does an import quota differ from an equivalent tariff?How does an import quota differ from an equivalent tariff?

Answer 3

Both the import quota and the tariff raise the domestic price of the good, reduce the welfare of domestic consumers, increase the welfare of domestic producers, and cause deadweight losses.

Question 4

List five arguments given to support trade restrictions.

Answer 4

The jobs argument; the national security argument; the infant industry argument; the unfair competition argument; and the protection-as-a-bargaining-chip argument.

Question 5

a. What is consumer surplus, and how is it measured?

Answer 5

Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it

Question 6

What is the relationship between the demand curve and the willingness to pay?

Answer 6

the demand curve shows maximum amount buyers WTP for a given market quantity, the demand curve represents the WTP of the marginal buyer.

Question 7

Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve.

Answer 7

When the price of a good falls, consumer surplus increases for two reasons

1.) paying less than area b
2.) price of the good is less than their wtp

Question 8

In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

Answer 8

Since the demand curve represents the maximum price the marginal buyer is willing to pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good.

Consumer surplus, then, measures the benefit the buyer didn’t have to “pay for.”

Question 9

According to most economists, do any of these arguments really justify trade restrictions? Explain.

Answer 9

the jobs argument, the infant industry argument, and the unfair competition argument on strictly economic grounds.
The bargaining-chip argument carries high risks of economic harm if the threat doesn’t work.
The national-security argument balances economic loss from trade restriction against the benefit of long-term national survival

Question 10

How does an import quota differ from an equivalent tariff?

Answer 10

The only difference for the economy is that the tariff raises revenue for the government, while the import quota creates surplus for license holders.