Question 1 of 3

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You must read each slide, and complete any questions on the slide, in sequence.

According to Chinese government statistics, China imported over 1 million cars in 2012. Let’s see what would happen to consumer and producer surplus if China were to ban car imports. To keep things simple, let’s assume that if car imports were banned, the equilibrium price of cars (holding quality constant) would rise by $5,000.

In the figure, which area(s) represent the total gains from trade when car imports are allowed into China.

A + B + C + D

A + B + C

Correct! Total gains from trade when imports are allowed equals domestic consumer surplus plus domestic producer surplus. Consumer surplus equals areas A + B + C and producer surplus equals area D, so the total gain is A + B + C + D.

Sorry! The area you selected is a part of the gains from trade, but it does not equal the total gains from trade. To review how to determine the gains from trade, please see the section “The Costs of Protectionism.”

Once China bans the import of cars, the dollar value of the lost gains from trade will be (Hint: The chapter provides the formula.)

$2,500,000,000

$17,500,000,000

$35,000,000,000

$5,000,000,000

If car imports are banned, Chinese car producers will be better off and Chinese car consumers will be worse off. A polygon in the figure shows the surplus that will shift from consumers to producers. Which area(s) would represent this “transfer”? (Hint: It’s not the area you calculated in Question 2.)

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Question 1 of 3

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