Eastwood's ECO 486 page   Solutions

1. Prove the following proposition: Free trade is better than no trade.

2. Prove: Some trade (trade with tariffs) is better than no trade.

3. Suppose that a country imposes a pure revenue tariff. Calculate the welfare effects of this tariff. How do these effects differ from the usual deadweight costs analyzed in the chapter?

4. The less elastic (i.e. the steeper) is the domestic supply curve, the lower is the production deadweight cost of any tariff. True or false? Demonstrate and explain. Use the small-country assumption.

5. The more elastic (i.e. the flatter) is the domestic demand curve, the lower is the consumption deadweight cost of any tariff. True or false? Demonstrate and explain.

6. Use the data in the table below to calculate U.S. tariff revenues on rubber footwear, women's shoes, and luggage.

 The answer to this question involves the following identity:
consumer cost = producer gain+ deadweight cost + tariff revenue.

7. Given the following information, calculate the cost to consumers, the benefit to producers, the change in government revenue, and the deadweight costs of a proposed 20% tariff on personal computers imported by a small country.

8. Given the following information, find the Nominal Rate of Protection (NRP) and the Effective Rate of Protection (ERP) in the personal computer (PC) industry:

Suppose the government were to impose a tariff of 30 percent on memory chips. What would happen to the NRP and the ERP in the PC industry? Derive and explain.

9. In Argentina, there are export tariffs on both raw materials such as soybeans and on processed soybean products (e.g. oils). Use the theory of effective protection to explain which tariff is likely to be higher.

10. Recently, the World Bank has been advising member countries to adopt uniform tariff rates on all imports. Suppose a country such as Chile adopts a uniform tariff of 20 percent ad valorem on all imports. Compare Chile's NRP and ERP under this policy. Why do you suppose the World Bank has been advocating uniform tariff rates?

11. Given the following information, find the NRP and the ERP in the personal computer (PC) industry:

Suppose the government were to impose a tariff of 30 percent on memory chips. What would happen to the NRP and the ERP in the PC industry? Derive and explain. See pages 173-176.

 With no tariff on memory chips, the answers are:

NRP =

ERP = .

With a tariff of 30 percent on memory chips in addition to the $200 tariff on PCs, the rates of PC protection are:

NRP =

ERP =

12. Suppose a (small) country imposed a specific export tariff of $t on each unit of its exports of a certain product. Depict this situation graphically, and calculate the welfare cost of this policy.

13. In Argentina, there are export tariffs on both raw materials such as soybeans and on processed soybean products (e.g. oils). Use the theory of effective protection to explain which tariff is likely to be higher.

14. Prove that if a product is made with only domestic factors of production (i.e., there are no imported intermediate components), then NRP equals ERP.

15. Recently, the World Bank has been advising member countries to adopt uniform tariff rates on all imports. Suppose a country such as Chile adopts a uniform tariff of 20 percent ad valorem on all imports. Compare Chile's NRP and ERP under this policy. Why do you suppose the World Bank has been advocating uniform tariff rates?

16. Use the data in Table 6.6 to compare U.S. protectionist policies with those of Japan. In what sectors are protection levels relatively equal? Where do they differ? Try to explain these patterns.

According to the table, on average Japan's tariffs are about twice as high as U.S. tariffs, but are relatively close to the mean tariff for developed countries. Japan's highest tariffs are on agricultural products and food, beverages, and tobacco. By contrast, these sectors rank among the least protected sectors in the United States. Clearly this pattern tells us something about the relative scarcity of farm land in Japan compared to the United States. Tariffs on most manufactured products are low in both countries, representing the fact that each is a significant exporter of manufactured goods. The highest U.S. tariff rate is found in apparel, a U.S. industry that has long history of competing with foreign imports.

17 (in the 6th edition. If you have the 6th edition, work its question 18 instead.) This question is for mathematically-advanced students and is NOT assigned. Suppose that a large country imports coffee. Let the import demand curve be given by

P = 200 - 2C

and the world's export supply curve for coffee be given by

P=10+C

where P is the price of coffee and C is the quantity of coffee.

a) Calculate the "optimum tariff" assuming no retaliation.

b) What would the revenue maximizing tariff rate be? How much revenue would be raised at this rate?

17. (In the 7th edition -- #18 in the 6th edition) Suppose that the domestic demand and supply for shoes in a small open economy are given by

P = 100 - 2Q (demand)

P= 5+Q (supply)

 where P denotes price and Q denotes quantity.

a) What are the autarky price of shoes and quantity produced?

b) What are are the levels of domestic production, consumption, and imports if the world price is 10?

c) How would your answers in part b change if this country were to impose a tariff of 3?