1) Where member countries reduce or abolish restrictions on trade between each other while   maintaining their individual protectionist measures against non-members is called a     Common Market   Customs Union   Economic Union   Free Trade Area 2) Suppose that Mexico and Canada form a free-trade area

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1) Where member countries reduce or abolish restrictions on trade between each other while   maintaining their individual protectionist measures against non-members is called a

 

	Common Market
	Customs Union
	Economic Union
	Free Trade Area

2) Suppose that Mexico and Canada form a free-trade area. Mexicans then decrease auto manufacturing and increase imports of autos from Canada, while the Canadians decrease computer production and import more computers from Mexico. This is an example of:

 

	Trade diversion
	Trade creation
	Trade destruction
	Trade exhaustion

3) Suppose Nauru is a small country that can import “rice” at the world price. There is a positive production externality from domestic rice production that producers cannot appropriate. Specifically, this means that each unit of rice produced yields a marginal external social benefit. Which of the following policies should be implemented by Nauru to address this market failure if the goal is to maximize social welfare?

 

	A tariff on rice imports
	An export subsidy for rice exports
	A quota on rice imports
	A production subsidy for domestic rice production

4) Suppose a country imports wheat at the world price and that the domestic production of wheat in that country is subject to positive externality. In such a case, a production subsidy would be better than a tariff to address the market failure as

 

	production subsidy can increase government revenue
	tariff does not affect producer or consumer surplus
	production subsidy does not affect consumer surplus
	tariff can decrease government revenue