Question

Intermediate microecon question

2· "The tariffs on imported washing machines were announced in late January 2018, took effect the next month in February and are scheduled to continue for the next three years. In the first year, there is a 20% tariff on the first 1.2 million imported washing machines 3 " (Mark J Perry, 7/11/18) As a result, prices of washers rose by 16.4% from February to May this year. (This year's steel and aluminum tariffs are also impacting washer prices but those went into effect June 1. See part d.) a. Show the effect of a tariff on a supply and demand graph for imported washing machines. A tariff is a tax on foreign producers so the analysis is just like the tax analysis in the appendix to chapter 2. Show what happens to the number of foreign- made washers sold and the price. b. Since a 20% tariff led to a 16.4 % price increase what does that tell you about the slope of the demand curve relative to the supply? ("Concept check" 2A.3 can help you here.) Briefly explain. c. Since the tax is just on imported washers, can consumers avoid the price increase by buying American made washers? Draw a supply and demand graph for American- made washers. Show which curve shifts and the effect on price and quantity Redraw your graph from part c herc. Now, add the effect of the more recent tarifts on aluminum and steel on the market for American made washers. (Washers are made with both metals.) In part ç we could state what would happen to price and quantity Now we have two shifts going on and each affects those variables. Can we be certain about the direction of the change in price from these two shifts? Can we be certain about the direction of the change in quantity? Explain with reference to your graph

Answer 1

Hi

I have tried to explain the tariffs for parts (a) and (d) in a single graph. Please see attached.

(a) The effect of a tariff on imported washing machines would be to increase the cost of the imported washing machine and hence, the price of the product. Hence, no of foreign washing machines will decrease

(b) % Increase in tariff of 20% led to a 16% increase in price of the washing machines, this indicates that some effect of the increased tariff was borne by the importer as it wasn't passed on to the consumer, it appears that the importer is cautious of increasing the price of the washing machine, as he feels that the demand may decrease.

(c) The demand for american washing machines would certainly increase here, as some of the consumers shift towards American products Yes, the consumers can avoid the price increase by buying local product, (but in reality, the local producers would also increase their price by a smaller amount, so as to be close to imported prices). Here, the demand curve for American washing machines would shift outwards.

  (d) Tariffs on Aluminium and Steel imports would increase the cost for Domestic manufacturers, but the prices of foreign imported washing machines won't be affected, thus countering the effect of import tariff. Now, we see two effects for American producers: 1. Increase in demand due to consumers buying American product (due to tariff) 2. Increase in cost of production, of domestic washing machines. Both would raise the prices of the product, hence the effect on price is certain. But, the effect on quantity is not certain as 1. increases quantity demand, while 2 would reduce quantity supplied. Therefore, we cannot conlude if Q* would be lesser than or greater than Q1

See the graphs attached.

Hope this helps. It was a long question. Please let me know if I have missed something, would be happy to answer it in the comments.