Multiple Choice
Refer to Figure 3-1. Using the graph above and beginning on demand curve D1, a shift to demand curve D2 would indicate a(n):
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0. Basic Principles of Economics
Graphing Review
Multiple Choice
Graphical analysis of tariffs reveals that:
A
tariffs eliminate the price difference between domestic and world markets
B
tariffs have no effect on the quantity of imports
C
tariffs always increase total welfare in the importing country
D
tariffs create a deadweight loss by reducing consumer and producer surplus
Verified step by step guidance1
Understand the role of tariffs: A tariff is a tax imposed on imported goods, which raises the domestic price of those goods above the world price.
Analyze the effect of a tariff on prices: Since the tariff increases the cost of imports, the domestic price rises, but it does not eliminate the price difference between domestic and world markets; instead, it narrows the gap by making imports more expensive.
Examine the impact on quantity of imports: The higher domestic price caused by the tariff reduces the quantity of imports because consumers buy less of the now more expensive imported goods.
Evaluate welfare effects: The tariff increases producer surplus (domestic producers benefit from higher prices) and government revenue (from the tariff), but reduces consumer surplus (consumers pay higher prices and buy less).
Identify deadweight loss: The reduction in consumer surplus exceeds the gains to producers and government revenue, creating a deadweight loss, which represents the net loss in total welfare due to inefficient resource allocation caused by the tariff.
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