Question

3. The graph below depicts the cost and demand conditions of an industry that is seeking infant industry protection from its government. It assumes that the world price of the good is $15 in 2017 and is also projected to remain at $15 in 2020. (20P) a. If the industry were operating under world market conditions in 2017, it could supply 8 million units but the industry could/could not break even because its average cost at this supply level is above/below the world price of $15. b. If the government imposed an import tariff of the domestic price would increase to domestic supply would be and the industry could break even. Under such an import tariff, US national welfare in 2017 would increase/decrease by c. The idea behind infant industry protection is that the import tariff is permanent temporary. d. The graph below assumes that the industry's average cost curve between 2017 and 2020 increases/decreases with the new average cost curve in 2020 being depicted by__ . In 2020, the domestic industry is able to supply_ _and is able to break even at the world price of__ In 2020, producer surplus is equal to _ _and infant industry protection will increase national welfare if _ _is larger than Price 2017 Price 2020 MC 8 12 15 18 Quantity in milions 20 Quantity (in millions)

Answer 1

a. the right answer is that the industry would not break even, since its average cost is above than the world price

b. if the govt. imposed a tariff of $5 the domestic price would increase of $20, domestic supply would be 12 and the industry could break even. Under such an import tariff US national welfare in 2017 would fall to the extent of the difference between the loss of consumers' surplus and the sum of gain to producers and tariff income earned by the govt. In this case, it is equal to the sum of triangles g and c.

c. the idea behind infant industry tariff protection is temporary (since such tariffs are meant to go away once the local industry has matured)

d. the graph assumes that the average cost curves between 2017 and 2020 decreases with the new average cost curve in 2020 depicted by AC'. In 2020 the domestic industry is able to supply 14 units and is able to break even at the world price of $15. In 2020 producers' surplus is equal to the area of triangle d and infant industry protection will increase national welfare if the increase in producers' surplus is greater than the loss consumers' surplus.