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# Economics 461 Midterm 2 Exam

Subject: Economics    / General Economics
Question

Practice Midterm 2

1. Refer to Figure 1. At a price of \$70, the consumer surplus equals:

Figure 1

a. \$6,000,000.

b. \$8,000,000.

c. \$5,000,000.

d. \$10,000,000.

2. Refer to Figure 1 above. At a price of \$70, the producer surplus equals:

a. \$6,000,000.

b. \$8,000,000.

c. \$15,000,000.

d. \$30,000,000.

3. Use the following supply and demand equations to answer questions 3-10 below. Suppose the domestic supply (QS) and demand (QD) for skateboards in the United States are given by the following set of equations:

QS = –60 + 3P

QD = 390 – 2P

In the absence of international trade in skateboards, what will be the equilibrium price of skateboards in the United States?

a. \$66

b. \$90

c. \$45

d. \$150

4. In the absence of international trade in skateboards how many skateboards will be sold in the United States?

a. 138

b. 258

c. 210

d. 930

5. If the United States can imports skateboards from the rest of the world at a per unit price of \$75, how many skateboards will be produced in the United States?

a. 165

b. 240

c. 285

d. 215

6. If the United States can import skateboards from the rest of the world at a per unit price of \$75, what will be the total demand for skateboards in the United States?

a. 165

b. 240

c. 285

d. 245

7. If the U.S. engages in free trade and the international price of skateboards is \$75, it would import _____ skateboards from the rest of the world.

a. 65

b. 85

c. 75

d. 95

8. In the absence of trade with the rest of the world, the consumer surplus in the United States skateboard market equals _____ and the producer surplus equals_____.

a. \$7,050; \$11,525

b. \$31,500; \$9,450

c. \$20,474; \$7,350

d. \$11,025; \$7,350

9. Calculate the change in consumer surplus when the United States engages in free trade and imports skateboards from the rest of the world at a per unit price of \$75.

a. +\$2,850

b. –\$2,850

c. –\$6,300

d. +\$3,375

?

10. Calculate the change in producer surplus when the United States engages in free trade and imports skateboards from the rest of the world at a per unit price of \$75.

a. +\$2,812.50.

b. -\$2,812.50.

c. +\$3,375.

d. -\$3,375.

11. Which of the following is an impact of tariffs on the country imposing them?

a. The domestic producers of import-competing products are forced to charge a lower price for their products to retain market share.

b. The supply of the domestic import-competing products declines.

c. The domestic consumers pay a higher price for the imported products.

d. The demand for the imported goods by the domestic consumers increases.

12. Which of the following correctly identifies the impact of tariffs on the producers of import-competing products in the imposing country?

a. They can price their products higher than the imported goods.

b. They can expand their production and sales.

c. They are forced to go out of business in the long run.

d. They are forced to charge a price equal to the average cost of production.

13. If a small country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will _____.

a. rise; fall

b. fall; rise

c. remain constant; rise

d. remain constant; fall

14. If a large country imposes a tariff on imported motorcycles, the world price of motorcycles will _____ and the domestic price of motorcycles will _____.

a. rise; fall

b. fall; rise

c. remain constant; rise

d. remain constant; fall

?

15. Figure 2 below shows the market for computers in the U.S. The domestic price line inclusive of the tariff lies above the international price line. Dd and Sd are the domestic demand and supply curves of computers respectively.

Figure 2

Under free-trade the U.S. imported _____ computers, but following the imposition of the tariff the U.S. began to import _____ computers.

a. 100,000; 70,000

b. 70,000; 100,000

c. 200,000; 190,000

d. 90,000; 100,000

16. Please refer again to Figure 2. The imposition of a tariff on computers caused the surplus of the domestic producers to _____ by _____.

a. rise; \$20 million

b. rise; \$800,000

c. rise; \$44 million

d. fall; \$48 million

17. Please refer again to Figure 2. The imposition of a tariff on computers caused the surplus of the U.S. consumers to _____ by _____.

a. fall; \$10 million

b. fall; \$40million

c. rise; \$76 million

d. fall; \$78 million

18. Please refer again to Figure 2. Calculate the tariff revenue of the U.S. government.

a. \$400,000

b. \$40 million

c. \$28 million

d. \$76 million

19. Please refer again to Figure 2. The imposition of a tariff on computers caused economic well-being in the U.S. to _____ by _____.

a. fall; \$3 million

b. fall; \$6 million

c. rise; \$34 million

d. fall; \$34 million

20. The nationally optimal tariff for a large country is the tariff for which:

a. the price in the importing country is the lowest.

b. the government collects the highest tariff revenue.

c. deadweight loss from the tariff is the lowest

d. total surplus of the importing country is the highest.

21. Which of the following has overseen the global rules of government policy toward international trade since 1995?

a. The World Trade Organization

b. The General Agreement on Tariffs and Trade

c. The International Monetary Fund

d. The World Bank

22. Which of the following oversaw the global rules of government policy toward international trade between 1947 and 1995?

a. The World Trade Organization

b. The General Agreement on Tariffs and Trade

c. The International Monetary Fund

d. The World Bank

23. Country A is a large country that imports good-quality processed chicken from country B. Suddenly, country A’s government decides to impose a tariff on this import. Who among the following will be adversely affected by this policy?

a. Consumers of chicken in country B

b. Consumers of ham in country B

c. Producers of chicken in country B

d. Suppliers of chicken in Country A

24. Restricting imports into a small country by the government:

a. protects domestic producers from foreign competition.

b. increases consumer welfare in the country.

c. increases the general welfare of the importing nation.

d. increases well-being of the global economy.

?

25. Which of the following is NOT true of nontariff barriers to imports?

a. Nontariff barriers can limit imports with greater certainty than tariffs.

b. Unlike tariffs, the nontariff barriers do not increase the price of the imported goods in the domestic markets.

c. Some nontariff barriers create uncertainty about the conditions under which imports will be permitted.

d. Like tariffs, nontariff barriers also result in a net welfare loss in a small country.

26. One of the reasons that protectionists and government officials may favor using a quota instead of a tariff is:

a. quotas generate more revenue for the government than tariffs.

b. quotas ensure that the quantities of imports are strictly limited.

c. quotas create less market distortions than tariffs.

d. quotas give less power to politicians than tariffs.

27. Which of the following is true of a quota:

a. Imposition of a quota causes domestic prices to fall below world prices.

b. Imposition of a quota by a country causes the world price of the good imported by this country to rise.

c. A quota is a quantitative restriction on imports.

d. A quota is always more efficient than a tariff.

28. Which of the following is a means of allocating import licenses by assigning the licenses without competition, applications, or negotiation?

a. Fixed favoritism

b. Resource-using application procedures

d. Domestic content requirements

?

29. Figure 3 below shows the market for MP3 players in a small country. Dd and Sd are the domestic demand and domestic supply curves of the MP3 players before the imposition of the quota. (Sd + QQ) is the total available domestic supply curve after the quota has been imposed. How many MP3 players can be imported from abroad after the quota is imposed?

Figure 3

a. 2 million.

b. 5 million

c. 12 million

d. 17 million

30. The quota on MP3 players will cause domestic producers to:

a. gain \$150 million.

b. lose \$100 million.

c. gain \$110 million.

d. lose \$120 million.

31. The quota on MP3 players will cause domestic consumers to:

a. lose \$25 million.

b. gain \$25 million.

c. lose \$170 million.

d. lose \$195 million.

32. According to Figure 3, how much revenue can the government expect to receive if the import licenses are auctioned?

a. \$20 million

b. \$50 million

c. \$120 million

d. \$170 million

33. If the government auctions the import licenses, the quota on MP3 players will result in a(n) _____ in the national well-being by_____.

a. decrease; \$35 million

b. decrease; \$85 million

c. increase; \$70 million

d. increase; \$195 million

34. According to Figure 3, if import licenses are allocated based on a resource-using procedure, the loss to the economy will be:

a. \$35 million.

b. less than \$10 million.

c. greater than \$35 million.

d. \$25 million.

35. Referring to the figure, if instead of using a quota to limit imports they were limited by a voluntary export restraint (VER), the loss to the nation would be:

a. \$35 million.

b. \$50 million.

c. \$85 million.

d. \$195 million.

36. With a voluntary export restraint (VER), the economic rent created for the quantitatively limited on trade is collected by:

a. the government of the importing county.

b. the consumers in the importing country.

c. the producers in the importing country.

d. the exporting firms in the foreign countries

37. Which of the following mandates that an import distributor must buy a certain percentage of the product locally?

a. An import quota

b. A mixing requirement

c. A voluntary export restraint

d. A domestic content requirement

38. Which of the following NTBs may generate revenue for the government?

a. Government procurement

b. Voluntary export restraint

c. Import quota

d. Domestic content requirement

?

39. What is the percent reduction in import quantity in a country due to the tariffs imposed by the government, if the country’s import tariffs are all 10 percent. The total imports affected by the tariffs are 40 percent of the GDP and the net national loss from the tariffs as a percentage of GDP is 0.6 percent.

a. 50 percent

b. 40 percent

c. 30 percent

d. 20 percent

40. Figure 4 below shows the domestic demand (Dd) and supply (Sd) curves of mopeds in a country before an import quota is imposed by the government. After the imposition of quota, the total available supply curve becomes Sd + QQ.

Figure 4

After the quota is imposed by the government, the domestic producers:

a. lose \$2.5 million.

b. gain \$27.5 million.

c. gain \$42.5 million.

d. lose \$80 million.

41. Please refer to Figure 4. After the quota is imposed, the domestic consumers:

a. gain \$7.5 million.

b. lose \$21.25 million.

c. lose \$82.5 million.

d. gain \$97.75 million.

?

42. Please refer to Figure 4. If the government auctions the quota licenses, how much will it collect as revenue?

a. \$31.5 million

b. \$45 million

c. \$76.5 million

d. \$72 million

43. Please refer to Figure 4. If the government auctions the quota licenses, the importing nation will:

a. lose \$10 million.

b. lose \$29.75 million.

c. gain \$31.5 million.

d. gain \$21.5 million.

44. Which of the following features does a free trade area necessarily have?

a. Absence of any trade barriers among the member nations

b. Equal tariffs rates

c. Free movement of factors of production across the member nations

d. Harmonization of all economic policies

45. Which of the following is true of an economic union?

a. Free movement of resources, but restricted movement of goods among the member countries

b. The members have a common set of tariffs among themselves but the external tariff rates are determined independently

c. Free movement of goods, but restricted movement of resources across the member countries

d. Harmonization of all economic policies in the member countries

46. Which of the following features does a customs union have?

a. Free trade among those members which have similar economic policies

b. Common set of external tariffs

c. Free movement of factors of production

d. Harmonization of all economic policies

47. Formation of trade blocs can be considered beneficial because it:

a. encourages purchases from higher-cost producers.

b. causes international friction when certain countries are let in the bloc and others are left out.

c. diverts world trade from low-cost producers to high-cost producers by encouraging too much trade within blocs.

d. encourages increased total trade by each member country.

48. Which of the following states that any trade concession given to any foreign country must be given to all other countries having the same status?

a. The principle of retaliation

b. The structural adjustment program

c. The most favored nation principle

d. The purchasing power parity theory

49. _____ determine(s) which products have been produced within a free-trade area and which products have been produced outside the area and therefore are subject to trade barriers.

c. Rules of origin

d. The most favored nation principle

50. Embargoes are likely to be effective when:

a. the supply curve of the embargoing country ishighly inelastic.

b. the demand for imports by the target country is relatively elastic.

c. a small county imposes an embargo on a large country.

d. the sanctions are sudden and comprehensivewhen first imposed.

51. A trade embargo harms:

a. only the target country.

b. only the country that initiates the embargo.

c. both the target country and the country initiating the embargo.

d. the target country and the nonembargoing countries.

52. “The higher the tariff, the more domestic production is increased. Thus, a prohibitive tariff is socially optimal.” Explain why this statement is valid or invalid.

53. A country can actually improve its well-being if it is in a position to impose a non-zero “optimal tariff”. Explain what an optimal tariff is, what conditions must be in place in order to implement an optimal tariff, and how such a tariff will increase national welfare. Assuming a country could impose an optimal tariff, would you suggest it do so? Justify your answer.

54. Briefly discuss different methods of allocating quota licenses to the importers by the government. Also explain the inefficiency implications of each method.

55. Show graphically and explain the effects of imposition of a quota by a small country under competitive conditions. The quota rights are given away for free to a fixed set of import distributor firms in the country.

56. What are NTBs? Discuss any three forms of NTBs other than quotas and VERs.

57. “Countries usually experience substantial economic gains from joining trade blocs.” Do you agree or disagree with this statement? Why? In your answer, include discussion of the roles of trade creation and trade diversion. Also include discussion of other gains that can arise in a country that chooses to join a trade bloc?

58. What is an economic embargo? While the embargo is in effect, does it benefit or hurt the embargoing countries?The country on which the embargo is being imposed? What conditions lend themselves toward a successful embargo?