Question

#1

	Mexico		U.S.
Possibility	Planes	Cars	Planes	Cars
A	9	0	15	0
B	6	9	10	10
C	3	18	5	20
D	0	27	0	30

A) Suppose, the world price for cars is $10,000. Further, the US has a quantity demand at that price of 1,000 cars, and a quantity supplied of 200. How many cars will the US import to satisfy domestic demand?

B) From the previous question, suppose the US imposes a $2,000 tariff on each car. Further, suppose that domestic quantity demand falls by 200 and the domestic quantity supplied rises by 200. What is the new quantity of imports? How does a tariff harm societal welfare?

Answer 1

a) The price of the car is $10000 and demand in the US market is 1000 cars at that price. The domestic supply is 200 which means there is shortage of 800 cars.
The US will import 800 cars to satisfy the demand.

b) The imposition of tariff by the US will raise the price of the car to $12000. At this price the domestic quantity supplied will rise by 200 to 400. However, at higher price the fewer people are willing to buy cars and demand has fallen by 200 to 800
(1000 - 200) - (200 + 200) = 400
The US import will fall from 800 cars earlier to 400 cars.

The imposition of tariff has raised the price from earlier $10000 to $12000 and decreased the demand. The lower consumption at higher price is the consequence of tariff which distorts the market and also erodes welfare of the society through dead-weight loss.
The dead- weight loss concept says that the intervention in the market through any measure such as tariff will distort the market forces and that would affect the price as well as consumption causing a loss to the society because this loss will not translate gain to any party such as producer or the government.