HOMEWORK 3 (CONSUMPTION TAX AND PRODUCTION SUBSIDY) ECO41 FALL 2012 UDAYAN ROY Due in class on Wednesday, October 3, 2012 Consumption tax Suppose the market for in Tanzania, a small country, is represented by the diagram below. The worldwide price of is $15 per unit, as shown. (Hint: Is there any difference between the autarky outcome and the free trade outcome?) Price Supply 20 A World Price 15 B E C F D Demand 10 25 40 Quantity 1. The autarky price of is: a. More than $20 b. $20 c. Between $15 and $20 d. $15 e. Less than $15 2. Under free trade, Tanzania will: a. export b. import c. export 40 units of and import 10 units of d. neither export nor import any
3. Suppose the Tanzanian government now allows free trade but imposes a $5 per unit consumption tax on consumers of. In Tanzania, the price that buyers will pay is and the price that sellers will receive is. a. $15; $20 b. $10; $15 c. $20; $15 d. $20; $20 4. As in the previous question, suppose the Tanzanian government now allows free trade but imposes a $5 per unit consumption tax. Tanzanians will produce units of and consume units of. a. 10; 40 b. 10; 25 c. 25; 10 d. 25; 25 5. We can conclude that the consumption tax a. has turned Tanzania s from a country that did not trade in into a country that imports b. has turned Tanzania s from a country that did not trade in into a country that exports c. has turned Tanzania s from a country that exported into a country that imports d. has turned Tanzania s from a country that imported into a country that exports 6. As a result of the consumption tax, consumer surplus has gone from to. (Use combinations of the labels A through F in the diagram to answer this question.) c. ABC; ABC d. BCDEF; EF e. EF; BCDEF 7. As a result of the consumption tax, producer surplus has gone from to. (Use combinations of the labels A through F in the diagram to answer this question.) c. EF; EF d. BCDEF; EF e. EF; BCDEF 2
8. As a result of the consumption tax, total surplus has. (Use combinations of the labels A through F in the diagram to answer this question. Also, keep in mind that total surplus includes the tax revenues earned by the government.) a. remained unchanged b. decreased by C c. decreased by F d. increased by D 9. This analysis of the consumption tax and trade shows that a. The government can use a consumption tax to increase trade. This also increases national welfare (or, total surplus) because more trade means more national welfare. b. The government can use a consumption tax to decrease trade. This reduces national welfare (or, total surplus) because less trade means less national welfare. c. The government can use a consumption tax to increase trade. But such artificially created trade can actually reduce national welfare. d. The government can use a consumption tax to decrease trade. This increases national welfare (or, total surplus). 10. This analysis of the consumption tax and trade shows that a. free trade is better than autarky with or without a consumption tax b. free trade is worse than autarky with or without a consumption tax c. free trade is better than autarky when there is no consumption tax but may be worse when there is a consumption tax d. free trade is worse than autarky when there is no consumption tax but may be better when there is a consumption tax Production subsidy Suppose the market for in Tanzania, a small country, is represented by the diagram below. The worldwide price of is $15, as shown. 3
Price 20 A World Price 15 B F C G D E H 10 25 40 Quantity 11. The autarky price of is: a. More than $20 b. $20 c. Between $15 and $20 d. $15 e. Less than $15 12. Under free trade, Tanzania will: a. export b. import c. export 40 units of and import 10 units of d. neither export nor import any 13. Suppose the Tanzanian government now allows free trade but also gives a $5 per unit subsidy to Tanzanian producers of. In Tanzania, the price that buyers will now pay is and the price that sellers will now receive is. a. $15; $20 b. $10; $15 c. $20; $15 d. $20; $20 4
14. As in the previous question, suppose the Tanzanian government now allows free trade and also gives a $5 per unit subsidy to Tanzanian producers of. Tanzanians will consume units of and produce units of. a. 10; 40 b. 10; 25 c. 25; 40 d. 25; 25 15. We can conclude that the production subsidy a. has turned Tanzania s from a country that did not trade in into a country that imports b. has turned Tanzania s from a country that did not trade in into a country that exports c. has turned Tanzania s from a country that exported into a country that imports d. has turned Tanzania s from a country that imported into a country that exports 16. As a result of the production subsidy, consumer surplus has gone from to. (Use combinations of the labels A through H in the diagram to answer this question.) c. ABC; ABC d. BCDFG; FG e. FG; BCDFG 17. As a result of the consumption tax, producer surplus has gone from to. (Use combinations of the labels A through H in the diagram to answer this question.) c. FG; FG d. BCDFG; FG e. FG; BCDFG 18. As a result of the production subsidy, total surplus, which keeps in mind the subsidies that had to be paid with taxpayers money, has? (Use combinations of the labels A through H in the diagram to answer this question.) a. remained unchanged b. decreased by C c. decreased by G d. decreased by E 5
e. increased by D 19. This analysis of the production subsidy shows that a. The government can use a production subsidy to increase trade. This increases national welfare (or, total surplus) because more trade means more national welfare. b. The government can use a production subsidy to decrease trade. This reduces national welfare (or, total surplus) because less trade means less national welfare. c. The government can use a production subsidy to increase trade. But such artificially created trade actually reduces national welfare. d. The government can use a production subsidy to decrease trade. This increases national welfare. 20. This analysis of the production subsidy and trade shows that a. free trade is better than autarky with or without a production subsidy b. free trade is worse than autarky with or without a production subsidy c. free trade is better than autarky when there is no production subsidy but may be worse when there is a production subsidy d. free trade is worse than autarky when there is no production subsidy but may be better when there is a production subsidy 6
ANSWER SHEET HOMEWORK 3 (CONSUMPTION TAX AND PRODUCTION SUBSIDY) ECO41 FALL 2012 UDAYAN ROY NAME: 1 11 2 12 3 13 4 14 5 15 6 16 7 17 8 18 9 19 10 20 7