Question

3)      Explain why the following statements are true or false:                                                       

A: Exporting a good reduces consumer surplus therefor overall economic welfare decreases.                                                              

B: Importing a good reduces producer surplus therefore overall economic welfare decreases.                                                     

C: A tariff reduces imports, increases domestic production and producer surplus therefore overall economic surplus increases.       

D: Export subsidies increase both consumer and producer surplus thereof they improve overall net economic welfare. 


    .    4) Explain why the following statements are either true or false:

A: In a competitive labor market, a minimum wage above the market equilibrium will reduce the level of employment.
         B: In a monopoly labor market, a minimum wage set above equilibrium will always reduce the level of employment.
        

C: In bilateral monopoly labor markets the monopoly employer and the union bargain to an outcome that is closer to a competitive equilibrium.
        

D: If two industries have identical labor supplies and operate in competitive labor markets then there is no reason for them to have different wage levels. 


Answer 1

A) False.

Export of good will reduce the consumer surplus and increase the producer surplus, but increase in producer surplus is higher than decrease in consumer surplus. So total economic surplus will increase.

B) False.

Importing a good will decrease the producer surplus but increase in consumer surplus will be higher. So overall economic welfare will increase.

C) False.

Imposition of tariff will reduce the overall economic welfare. Producer surplus will increase but consumer surplus will decrease.

D) False.

Overall economic welfare will decrease because consumer surplus will decrease more than increase in producer surplus.

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