8. Tariffs Suppose the nation of Isoland is an importer of textiles and is looking for a way to raise government revenue. The following graph shows the effect of a tariff on textile imports. (? ) Supply A Price of Textiles B P +T C F F Demand D PW G 25. 1 D.2 Quantity of TextilesHaving rejected a tariff on textiles (a tax on imports), the president of Isoland is now considering the same-sized tax on textile consumption (including both imported and domestically produced textiles). Under a textile consumption tax, the quantity of textiles consumed in Isoland will be lower than _ the quantity consumed under a tariff, and the quantity produced in Isoland will be the same as _ the quantity produced under a tariff. The following table shows the effect of an import tariff on the nation of Isoland. Complete the remaining columns of the following table by indicating the effect of the same-sized tax on textile consumption. Under Tariff Under Consumption Tax Before Tariff or Tax After Change After Consumer A + B + C+ D + E+F A + B - (C+D +E+F) A + B+C+D+E+FY - (C+ Surplus Producer Surplus G C +G +C G Government None E +E Revenue Total Surplus A + B+ C+D +E +F+G A+B+C+E+G - (D + F) The consumption tax * raises more revenue for the government, and the consumption tax _ has a smaller deadweight loss associated4. Specialization and trade When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Sylvania. Both countries produce potatoes and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of potatoes and 12 million pounds of tea, as indicated by the grey stars marked with the letter A. (? (? Maldonia Sylvania 84 64 58 48 PPP 40 40 32 TEA (Millions of pounds) 32 TEA (Millions of pounds) 24 PPF 24 18 16 A Co Co 0 8 16 24 32 40 48 56 84 16 24 32 40 48 56 84 POTATOES (Millions of pounds) POTATOES (Millions of pounds) Maldonia has a comparative advantage in the production of , while Sylvania has a comparative advantage in the production of . Suppose that Maldonia and Sylvania specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of potatoes and million pounds of tea.Suppose that Maldonia and Sylvania agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 16 million pounds of potatoes for 16 million pounds of tea. This ratio of goods is known as the price of trade between Maldonia and Sylvania. The following graph shows the same PPF for Maldonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Maldonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. (?) Maldonia 84 Consumption After Trade 48 40 TEA (Millions of pounds) 32 24 PPF 18 DO 8 16 24 32 40 48 56 84 POTATOES (Millions of pounds)The following graph shows the same PPF for Sylvania as before, as well as its initial consumption at point A. As you did for Maldonia, place a black point (plus symbol) on the following graph to indicate Sylvania's consumption after trade. Sylvania 84 Consumption After Trade 48 PPF 40 32 TEA (Millions of pounds) 24 16 Co 8 16 24 32 40 48 56 84 POTATOES (Millions of pounds) True or False: Without engaging in international trade, Maldonia and Sylvania would have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.) O True O False