Directions: Please answer each of the following questions in a paragraph for each. Explain your thoughts with theory and examples where applicable.
1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?
2. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most economists, do any of these arguments really justify trade restrictions? Explain.
3. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this information.
a. What is the domestic price and quantity demanded of hammers after the tariff is imposed?
b. What is the quantity of hammers imported before the tariff?
c. What is the quantity of hammers imported after the tariff?
d. What would be the amount of consumer surplus before the tariff?
e. What would be the amount of consumer surplus after the tariff?
f. What would be the amount of producer surplus before the tariff?
g. What would be the amount of producer surplus after the tariff?
h. What would be the amount of government revenue because of the tariff?
i. What would be the total amount of deadweight loss due to the tariff?