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(Scenario: Payoff Matrix for Airbus and Boeing) The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in response to action on the part of the other company. This payoff matrix describes actions in developing so-called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce superjumbo jets. (Scenario: Payoff Matrix for Airbus and Boeing) The payoff matrix supplied shows outcomes of various strategies that Airbus and Boeing might follow in response to action on the part of the other company. This payoff matrix describes actions in developing so-called superjumbo jets that can carry 600 or more passengers. In each element, the lower-left value gives the outcome for Boeing based on the action of Airbus and the upper-right value gives the outcome for Airbus based on the action of Boeing. For example, in element A, each company will lose $10 million if they both decide to produce superjumbo jets. Boeing has decided NOT to produce superjumbo jets. Instead, it will continue to market its 450-passenger 747s. However, Airbus will produce superjumbo jets. Is Boeing's decision correct? A) Yes; because it would lose profits if it produced a superjumbo jet. B) No; because it could earn more profits by producing a superjumbo jet. C) Yes; because it would neither lose nor earn more profits by producing a superjumbo jet. D) No; because it would lose more profits if it produced a superjumbo jet. Boeing has decided NOT to produce superjumbo jets. Instead, it will continue to market its 450-passenger 747s. However, Airbus will produce superjumbo jets. Is Boeing's decision correct?


A) Yes; because it would lose profits if it produced a superjumbo jet.
B) No; because it could earn more profits by producing a superjumbo jet.
C) Yes; because it would neither lose nor earn more profits by producing a superjumbo jet.
D) No; because it would lose more profits if it produced a superjumbo jet.

E) B) and D)
F) B) and C)

Correct Answer

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(Scenario: Freedonian Exports) In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 - 3Q; the domestic supply of widgets is represented by P = 1Q. Now let Freedonia's government give a $15 per unit subsidy on each widget exported. What will be the new price and quantity consumed in the Freedonia domestic market?


A) $20 and 60 units
B) $55 and 15 units
C) $40 and 15 units
D) $25 and 25 units

E) A) and B)
F) None of the above

Correct Answer

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A payment to a firm for every unit exported is called an:


A) export tariff.
B) export stipend.
C) export restriction.
D) export subsidy.

E) C) and D)
F) A) and B)

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Who will lose as a result of the WTO's elimination of agricultural export subsidies?


A) consumers in industrialized countries that export agricultural products
B) farmers in developing countries who currently do not receive export subsidies
C) governments of rich nations, which will have to prop up farmers who are hurt
D) farmers in industrialized countries that export agricultural products

E) A) and C)
F) All of the above

Correct Answer

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Suppose that the world price of sugar is $100 per ton. If a large country gives its sugar exporters a subsidy of $50 per ton, then its domestic price of sugar will:


A) fall by $50 per ton.
B) rise by $50 per ton.
C) remain unchanged at $100 per ton.
D) rise by less than $50 per ton.

E) A) and D)
F) A) and C)

Correct Answer

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If a large nation subsidizes its exports, it will increase its supply to the world and:


A) will prosper through increased jobs for workers and profits for its firms.
B) the world price will fall.
C) consumers in the home nation will benefit through lower prices.
D) the nation will increase its imports as well.

E) C) and D)
F) A) and C)

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In a small country, an export tariff will cause a(n) _______ in the domestic price of the export and _______ in the world price of the export.


A) increase; a decrease
B) decrease; a decrease
C) decrease; no change
D) increase; no change

E) All of the above
F) A) and C)

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Suppose that a large country decides to reduce its agricultural export subsidies by 50%. Will the country gain or lose?


A) The country will always gain by reducing its subsidies.
B) The country will always lose by reducing its subsidies.
C) The country will gain if the reduction in its deadweight losses exceeds its terms-of-trade gains.
D) The country will gain if its terms-of-trade gains exceed the reduction in its deadweight losses.

E) All of the above
F) A) and D)

Correct Answer

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How will an export quota imposed by a large exporting country affect the domestic price?


A) It will cause an increase in the domestic price.
B) It will cause a decrease in the domestic price.
C) It will have no effect upon the domestic price.
D) It will first cause an increase, then a decrease in the domestic price.

E) B) and C)
F) A) and C)

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Compare the effects on the importing country of an export subsidy with an export tariff imposed by a large country.


A) The importing country will gain from both an export subsidy and an export tariff imposed by a large country.
B) The importing country will lose from both an export subsidy and an export tariff imposed by a large country.
C) The importing country will gain from an export tariff and lose from an export subsidy imposed by a large country.
D) The importing country will gain from an export subsidy and lose from an export tariff imposed by a large country.

E) B) and C)
F) A) and B)

Correct Answer

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Which policy does Europe use to subsidize the production of Airbus airplanes?


A) tax breaks
B) grants for research and development.
C) export quotas
D) import quotas

E) B) and C)
F) A) and D)

Correct Answer

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(Scenario: Freedonian Exports) In the small country of Freedonia, the domestic demand for widgets is represented by P = 100 - 3Q; the domestic supply of widgets is represented by P = 1Q. Calculate the value of the deadweight losses associated with the $15 per unit export subsidy.


A) $37.50
B) $75.00
C) $112.50
D) $150.00

E) None of the above
F) A) and D)

Correct Answer

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Does GATT allow export quotas?


A) No; Article XI bans all export quotas.
B) Yes; Article XI places no restrictions on export quotas.
C) Yes; Article XI allows export quotas on trade in military equipment.
D) Yes; Article XI allows temporary export quotas to prevent critical shortages of foodstuffs or other products essential to the exporting country.

E) All of the above
F) B) and C)

Correct Answer

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Why did China recently change its export quota policy on exports of rare earth minerals?


A) China's exports of rare earth minerals exceeded the maximum levels under the quota system.
B) It found that export tariffs were more successful than export quotas in maintaining high world prices.
C) Processing of rare earth minerals leads to low grade radioactive waste by-products.
D) The policy proved to be of little value to China as many other countries found other sources for rare earth minerals.

E) A) and B)
F) A) and C)

Correct Answer

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To improve the outcome of helping producers in a small nation by the targeting principle, the nation should:


A) use a production subsidy.
B) do nothing.
C) allow the market to work on its own.
D) use export subsidies.

E) B) and C)
F) A) and B)

Correct Answer

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Do both Boeing and Airbus produce double-decker superjumbo aircraft?


A) Yes, both produce double-decker superjumbo aircraft.
B) No, neither company produces double-decker superjumbo aircraft.
C) Boeing produces double-decker superjumbo aircraft but Airbus does not.
D) Airbus produces double-decker superjumbo aircraft but Boeing does not.

E) None of the above
F) B) and C)

Correct Answer

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How will an export quota imposed by a small exporting country affect the world price?


A) It will cause an increase in the world price.
B) It will cause a decrease in the world price.
C) It will not affect the world price.
D) It will first cause an increase, then a decrease the world price.

E) A) and C)
F) A) and B)

Correct Answer

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How will an export quota imposed by a large exporting country affect the world price?


A) It will cause an increase in the world price.
B) It will cause a decrease in the world price.
C) It will have no effect upon the world price.
D) It will first cause an increase, then a decrease the world price.

E) C) and D)
F) All of the above

Correct Answer

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In a two-firm industry, a Nash equilibrium occurs whenever:


A) each firm makes decisions without consideration of the other firm's actions.
B) the first firm makes decisions without consideration for the second firm's actions, whereas the second firm does consider the first firm's actions.
C) the second firm makes decisions without consideration for the first firm's actions, whereas the first firm does consider the second firm's actions.
D) each firm considers all possible actions by other firms and then chooses the best strategy.

E) B) and C)
F) None of the above

Correct Answer

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Because Boeing did not enter the market for superjumbo aircraft, it is:


A) possible that Airbus' profits will be large enough to offset subsidy costs.
B) unlikely that Airbus' profits will be large enough to offset subsidy costs.
C) unlikely that Boeings' profits on other aircraft will not offset subsidy costs.
D) possible that Airbus' profits on other aircraft will offset superjumbo subsidy costs.

E) B) and C)
F) A) and B)

Correct Answer

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