Question

1. US Mkt. for auto parts. On Friday, US imposed new tariffs on auto parts imported from China. Pw is the price of auto parts available to domestic car producers before the imposition of tariffs. On the graph, show (1) the price of auto parts with tariff (PT): (2) quantity of auto parts produced by domestic producers (Qsd): (3) quantity of auto parts bought by domestic car manufacturers (Qdd); (4) quantity of auto parts imported (IM): (5) revenue from tariff (TR): (6) Tariff deadweight loss (DWL). Price of auto parts available to domestic car producers quantity of auto parts available to domestic car producers. quantity of auto parts produced in the US_______ .

 2. US Mkt. cars. The changes in the price for auto parts affects supply/demand of cars because, _______ 

 On the graph: (1) Show the effect of the change in the price of auto parts. (2) Show consumer surplus (CS0) and producer surplus (PS0) before the imposition of tariffs; (3) Show consumer surplus (CS1) and producer surplus (PS1) after the imposition of tariffs; Equilibrium price_______  equilibrium quantity_______  consumer surplus_______ , producer surplus_______ 

Answer 1

1. I've labelled all the required information in the graph below. Just to clarify two things:

Revenue from Tariff (TR) is given by the area inside the rectangle ABCD.

Deadweight Loss from the Tariff is the area inside the two triangles- BCE and BDE. Its actually the sum of these two areas (I've labelled in 1 and 2 in roman numerals).

Price of auto parts available to domestic car producers: PT

Quantity of auto parts available to domestic car producers: Qdd

Quantity of auto parts produced in the US: Qsd

2. The changes in the price for auto parts effects the supply and demand for cars because auto parts are an input for car production. If inputs become more expensive, costs for car producers will increase. This will cause the supply curve to shift up. See the graph below

When the supply curve shits up, price increase from Pe to Pe'.

Showing the consumer and producer surplus by shading the graph is a little difficult. So I have named each region. For instance, region 1 is given by the area inside the triangle ADPe'. Region 3 is inside the triangle DCF. Similarly, region 5 is inside the quadrilateral BEFC. So that's how you read consumer and producer surplus in the graph.

Before Tariff: Consumer surplus is 1 + 2 + 3 (sum of area in region 1, 2 and 3).

Producer surplus is 4 + 5.

After tariff: Consumer surplus is just region 1.

Producer surplus is 4 + 2.

You can see that consumer surplus definitely falls. (region 1 is smaller than region 1 + 2 + 3)

Producer surplus may change either way. If region 2 is bigger than region 5, then producer surplus actually increases, otherwise it would fall.

So, to answer this question, the imposition of tariff, Equilibrium price rises, Equilibrium quantity falls, Consumer surplus falls, Producer surplus may rise or fall.