EconS 327
Week 4 Study Guide
Dr. Hallagan
Study Questions for Week 4
1. In 2005 the US tariff on imported brooms was $ .32 per broom. The tariff on imported
bicycles was 5.5% of the price of the bicycle. Which of these tariffs is an example of an “ad
valorem” tariff? Which is an example of a “specific tariff”?
2. What is the “small country” assumption? How is this related to the term “price taker”?
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EconS 327
Week 4 Study Guide
Dr. Hallagan
3. Refer to the figure above. For the case of free trade, fill out the table below.
World Price
$300
Domestic Price
$300
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
Consumer Surplus (domestic)
Producer Surplus (domestic)
Government Tariff Revenue
0
Total Surplus
4. Now consider the same model with a $30 tariff (10%) on imported bicycles. Fill out the table
below
World Price
$300
Domestic Price
$330
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
Consumer Surplus (domestic)
Producer Surplus (domestic)
Government Tariff Revenue
Total Surplus
5. Compare the tables you completed in #3 and #4. As a result of the tariff:
Consumer Surplus (increased/decreased) by $___________
Producer Surplus (increased/decreased) by $____________
Government Tariff Revenue increased from $0 to $_______
The “Net National Loss” of the tariff is $__________
6. Referring to the tariff example above, what is the consumption effect? How big is it? How is
it represented in the figure above?
7. Referring to the tariff example above, what is the production effect? How big is it? How is it
represented in the figure above?
8. Explain why the effective tariff rate can be higher than the nominal tariff rate.
9. What is the “large country” assumption? How is the “large country” assumption related to the
“terms of trade effect”?
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EconS 327
Week 4 Study Guide
Dr. Hallagan
Figure 8.5
10. Large Country model. Refer to figure 8.5 above. If there is no tariff then your answer to #3
still applies. If there is a $6 tariff imposed, the world price will (increase/decrease) to $______.
The domestic price will (increase/decrease) to $_______. Fill out the table below.
World Price
Domestic Price
Quantity Consumed Domestically
Quantity Produced Domestically
Quantity Imported
Consumer Surplus (domestic)
Producer Surplus (domestic)
Government Tariff Revenue
Total Surplus
11. Referring to the table you filled out in #10, as a result of the $6 tariff
Consumer Surplus (increased/decreased) by $___________
Producer Surplus (increased/decreased) by $____________
Government Tariff Revenue increased from $0 to $_______
The “Net National (Loss/Gain of the tariff is $__________
The consumption effect is$__________
The production effect is $____________
12. Refer to figure 8.5 above. For the importing country the gain from a tariff is the area
_________. The loss of the tariff is the area ______. The “nationally optimal tariff is the tariff
“that creates the largest net gain for the country imposing it” . What is the nationally optimal
tariff for this example?
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EconS 327
Week 4 Study Guide
Dr. Hallagan
$20 Tariff
Large Country
Pworldfalls from $30 to
$20
Price
Qs Domestic
Qd Domestic
Q Imported
Consumer
Surplus
Producer
Surplus
Tariff
Revenue
Total
Surplus
Large Country:
Pworld falls from $30 to $20 due this large country’s tariff and the resulting
decrease in imports.
Production
Effect
Consumption
Effect
Terms of
Trade Effect
13. Refer to the figure above. In this example, country A is a large country so that changes in
country A’s imports or exports will affect the price in the rest of the world (ROW). With open
trade country the world price would be $30, but if country A imposes a $20 per unit import
tariff, the world price will fall to $20. Thus A’s tariff has a positive affect (for A) by lowing the
price it pays for its imports (although the domestic price will increase from $30 to $40. Note that
in this example, a $20 tariff causes the domestic price to increase by only $10. Complete the
table. Does the $20 tariff cause a net increase or a net decrease in country A’s welfare?
14. Still using the example above, repeat this analysis for a $40 tariff that would cause the world
price to fall to $10 (the domestic price would now be $50).
15. According to the IMF article “The Truth about Industrial Country Tariffs”?, do US import tariff
cause the greatest loss in consumer surplus for low income Americans or high income
Americans? Do US import tariffs cause the greatest loss in producer surplus for exporters in low
income countries or high income countries?
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