ECON 340 MIDTERM 2 REVIEW QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026

ECON 340 MIDTERM 2 REVIEW QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026 Compare free trade with autarky in a perfectly competitive market. How does the introduction of free trade affect each group in the situation where the country would export the good? consumer surplus: Government Spending: producer surplus: - Answers Decrease does not change increase Compare free trade with autarky in a perfectly competitive market. How does the introduction of free trade affect each group in the situation where the country would import the good? producer surplus consumer surplus gov revenue - Answers decrease increase does not change An import tariff increases social welfare for the importing country if the terms of ______(50 %) gain is bigger than the ______(50 %) loss. The import tariff reduces the country's welfare when the opposite is true. - Answers trade, deadweight Suppose that Home and Foreign are the only two countries in the world, and that Home imports fish from Foreign. The Home autarky price of fish is $24, while the Foreign autarky price is $10. The free trade equilibrium price is $12 and the equilibrium quantity traded is 600. What is the dollar value of the gain from trade for the world as a whole? - Answers 4,200 Consider a country that exports 100 units of a particular good at the world price of $10. Economists estimate that the domestic price of the good would be $4 if all exports were eliminated. Compared with autarky, what is the dollar value of the net change in social welfare due to exports? - Answers 300 Home and Foreign are the only two countries in the world. Home levies a tariff on imports of Foreign skis. This creates a deadweight loss of $775 in Home and $800 in Foreign. In addition, there is a Home terms of trade gain of $1,000. From the perspective of the world as a whole, what is the dollar value of the change in social welfare resulting from this tariff? - Answers -1,575 Consider a country that imports 150 units of a particular good at the world price of $5. Economists estimate that the domestic price of the good would be $9 if all imports were eliminated. Compared with autarky, what is the dollar value of the net change in social welfare due to imports? - Answers 300 An import tariff causes some consumers to reduce their quantity demanded of the product, resulting in lower consumer surplus. The loss of this surplus is known as the ________ distortion. In addition, the tariff induces firms to produce more. The wasteful use of resources used to increase output is known as the _____ distortion. The sum of these to losses is known as the ______ loss - Answers consumption, production, deadweight There are two countries in the world (Home and Foreign). Home imports sugar from Foreign. Neither country is "small" in the technical sense. Thinking about producers and consumers of sugar in each country, who benefits from trade? Select all that apply. - Answers Forign producers, Home consumers An import quota is enforced by the government issuance of import licenses. These licenses create profit opportunities for those who hold them. What term is used to describe the profit from quota licenses? - Answers Quota rent how to find trade creation? - Answers The value of trade creation can be shown to equal the area of a triangle, where the base equals the amount of increased trade and the height is the difference between the old price (with tariff) and the new price. The formation of a preferential trade agreement can either increase or decrease social welfare. Social welfare increases if trade _______ is bigger than ____ and decreases if the reverse is true - Answers creation, diversion What does the World Trade Organization do? - Answers work to reduce trade barriers establish fair rules of trade settle trade disputes Tokyo Round - Answers First to address a large number of non-tariff trade barriers. Doha round. - Answers Not yet concluded, widely considered a failure. Kennedy round - Answers First to negotiate a formula for tariff reductions and first to address unfair trade practices such as dumping. Uruguay round - Answers First to address trade in services and protection of intellectual property. What aspect of free trade agreements is designed to eliminate trade deflection? - Answers Rules of origin how to determine the value of a payoff matrix when both countries import a tariff? - Answers Each country benefits from its own tariff, but imposes a cost on the other. When both levy their optimal tariffs (the case represented in the lower right cell of the matrix), the net effect is the country's gain from levying its own tariff minus the loss imposed by the trading partner imposing its own tariff. Which treaty established the foundation of the European Union? - Answers treaty of Rome What do we call a strategy that is the best response to the other country's strategy regardless of what the other country chooses to do. - Answers Dominant What does the acronym GATT stand for? - Answers General agreement on tariffs and trade. Suppose that the United States, China, and Mexico are the only three countries in the world. Further suppose that the United States initially has a $7 non-discriminatory import tariff on shirts, then subsequently forms a free trade area with Mexico. The Chinese cost of producing shirts is $9 and the Mexican cost is $10. In the case of a non-discriminatory tariff, the United States imports 1,100 shirts. - Answers 1,100 all of those shirts would shift to mexican production most favored nation - Answers If the United States levies a 25% tariff on Japanese trucks, it must also levy a 25% tariff on German trucks. national treatment - Answers The United States cannot have higher safety standards for trucks imported from Japan than it has for U.S. made trucks. The GATT might be viewed as an attempt to address which issue? - Answers the prisoners dilema Suppose that Ecuador currently has a non-discriminatory import tariff on goods originating in the United States or China. Ecuador and the United States are contemplating a free trade agreement. Economists estimate that the resulting trade creation will be $500 and trade diversion will be $450. What is the estimated net welfare effect on these three countries combined? - Answers 50 Which of the following are characteristics of a customs union? - Answers Member countries share a common policy toward non-members.