Question

Suppose the U.S. seeks to drastically increase domestic steel production. The current world price for steel is $300 per metric tonne. To increase domestic steel production the U.S. applies a tariff on all imported steel of $200 per metric tonne.

1. What is the price of a metric tonne of steel in the U.S. with the tariff?
2. How does consumer surplus change with the tariff? Indicate the change in consumer surplus using the letters provided.
3. How does producer surplus change with the tariff? Indicate the change in producer surplus using the letters provided.
4. Does the tariff create new surplus or deadweight loss? Explain using letters.

How does the tariff affect the supply of automobiles in the US?

Price (dollars per metric tonne) Sus А 700 B C D 500 E F G H I 3001 J K L M N O P Dus Quantity (metric tonnes)

Answer 1

A - After the imposition of tariff , the price of steel is now $ 500 per metric tonne

B - The consumer surplus changed from A+ b+c + d + e + f + g + h + i , to the region covered by A + B + C + D. Hence the area under the consumer surplus has decreased.

C - The producer surplus has increased . It has increased from previous area of J , to the area of J + E + F + G + H + I.

D - There has been creation of deadweight loss caused by the decrease in consumption due to increased price . This will be area of F + G + H + I.

The domestic supply of steel will now rise from area under K to area under K + F + L.