Suppose Canada Has a 20% Tariff on the Import of Carpets,and

question 82

Multiple Choice

Suppose Canada has a 20% tariff on the import of carpets,and Canada currently imports this product from India at a with-tariff price of $22.The with-tariff price of identical carpets from the United States is $24.Now suppose a free-trade agreement with the U.S.eliminates the tariff and so the no-tariff price from the U.S.is $20.Canada now purchases carpets from the U.S.Is Canada made better off from this trade diversion?

• A)No,because it would still be cheaper for individual consumers to buy carpets from India.
• B)Canada is not better or worse off.The gain in consumer surplus in Canada is identical to the loss in tariff revenue to the Canadian government.
• C)Yes,because Canadian consumers are paying less for carpets and consumer surplus has increased.
• D)No,because before the agreement Canada was buying from India at a lower (pre-tariff)price and collecting tariff revenue.
• E)Yes,because Canada has diverted trade toward the United States.

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