Questions 29 and 30 refer to the diagram below bus 3 4 5 8 1

Questions #29 and #30 refer to the diagram below: (/bus 3 4 5 8 10 Q( bushels) 29. If this small country currently trades freely with the rest of the world, which of the following is true? A tarifor ss/ bushet witt reduce domestic social surplus by C+ R . A tarit of S2 7bushel will reduce domestic soctat surptus by BG c. Both (a) and (b) are true. d. Neither (a) nor (b) is true. 30. If this small country currently trades freely with the rest of the world, which of the following is true? a. A quota of 3 bushels of wheat for which the licenses are given away to b. Negotiating with foreigners to have them voluntarily restrict their exports c. Both (a) and (b) are true. domestic producers of wheat will reduce domestic social surplus by C+F of wheat to 3 bushels will reduce domestic social surplus by C+E+F Neither (a) nor (b) is true. d.

Solution

Answer 29:

Option A. A tariff of $3 per bushel will reduce the domestic social surplus by C + F. E represents the tax revenue. C + F is the deadweight loss of tariff.

Answer 30:

Option B. Quota leads to greater fall in economic welfare as compared to tariff as there is no government revenue involved. But negotiating with the foreigners to have them voluntarily restrict their exports of wheat to 3 bushels will reduce domestic social surplus by C +E+F.