LS3 - Restrictions on free trade (Part 2)

Question 1

tariff diagram assumption

Answer 1

• domestic producers have influence over the price of goods in their domestic market - domestic producers are price makers in their home market
• producers have no influence over the price of goods on the intl. market - every producer is a price taker

Question 2

Autarky

Answer 2

a policy of national self-sufficiency and non-reliance on imports or economic aid

Question 3

Tariff diagram

Answer 3

• domestic economy has autarky - price makers
• economy opens up to trade so world supply enters, price takers, price below equilibrium
• supply less then demand so have to import triangle
• supply falls as all domestic producers can’t afford to compete at new price
• tariff applied so price rises, value of imports falls as more can compete

Question 4

tariff revenue

Answer 4

quantity of imports x tariff rate
tariff revenue is government revenue

Question 5

what happens to consumer surplus with a tariff?

Answer 5

• consumer surplus falls

Question 6

what happens to producer surplus with a tariff?

Answer 6

• producer surplus increases