Question

3. The optimal tariff argument in favor of protectionism cannot hold in country X unless (a) country X imposes a very high tariff (b) the other countries also introduce their own tariffs in response (c) country X's demand and supply affect world prices (d) the government in country X spends its revenues on public goods that benefit the median voter (e) none of the above

Answer 1

3. Option (c) country X's demand and supply affect world prices.

The Optimal tariff argument states that a country must be large importer of goods and services so that whenever it imposes a tariff, the local consumers of the tariff imposing country does not have to pay for it, rather the foreign supplier needs to pay for it by supplying their goods at a lower price than before.

4. Option (c) both internal and external economies of scale.

The necessary condition for the Infant Industry argument to hold is the presence of both internal and external economies of scale. This is because it is seen that since the infant industries lack both internal and external economies of scale when compared to their large competitors, they must be given support for example, in form of protection from the government so that they can attain both the economies of scale.