Question

1. The World Trade Organization (WTO) has asked its members to convert their trade restrictions from quotas to tariffs because

a. quotas reduce domestic consumer surplus.

b. there is less transparency in how the surplus from a quota is distributed.

c. tariffs increase domestic producer surplus.

d. tariffs only indirectly affect imports, while quotas directly restrict the quantity.

e. none of these.

2. The weekly demand for beach balls in the country of Natadonia is given by: P = 40 – Q, while the weekly supply is given by P = Q. The world price of beach balls is equal to $15 per ball. Openning to trade would result in a net _____ in total surplus for New Natadonia?

a. $50 loss

b. $50 gain

c. $25 loss

d. $25 gain

e. none of these

Answer 1

1)The welfare loss from tariff is lower than quota because tariff also generate tariff revenue to government . So that why tariff is preferred over quota.

So option E is correct

2) Without trade equilibrium,

40-Q=Q

Q=40/2=20

P=40-20=20

Total surplus=1/2*20*40=400

With trade,

Quantity demanded at world price: Qd=40-15=25

Quantity supplied at world price:Qs=15

Consumer surplus=1/2*25*(40-15)=0.5*25*25=312.5

Producer surplus=1/2*15*15=112.5

Total surplus=312.5+112.5=325

So trade increase total surplus by 25$.

Option c is correct