Question

foreign automakers that sell trucks in the US. It can do this by imposing an excise tax on each foreign truck sold in the US. The hypothetical pre-tax demand and supply schedule are given below: in thousands of trucks Price of imported truck Quantity Demanded 32,000 31,000 30,000 29,000 28,000 27,000 100 200 300 400 500 600 Quantity Supplied 400 350 300 250 200 150 a. In the absence of government interference, what is the equilibrium price of an imported truck. Draw a supply and demand curve. b. Assume that the government imposes a $3,000 excise tax per imported truck. Illustrate the effect of this excise tax on a new supply and demand schedule. How many trucks are demanded? How many trucks are supplied? c. Calculate the government revenue that was raised. d. How does the excise tax benefit American automanufacturers? Who is hurt by the excise taxes? How does inefficiency arise from this government policy?

Please answer the question d. at list if possible. Thanks in advance.

Answer 1

a) The equilibrium price without government interference is $30000 and the equilibrium quantity is 300000 as hown in the diagram below.

A Excise fax s3000 pea tuck 31 e2 9 ,貂 io。,200 300 400 500 600 Quanhty

b) The effect of the excise tax is illustrated in the diagram above.

A tax of $3000 per truck puts a wedge between the price paid by consumers,or the demand price ($31000),and the price received by the producers,or the supply price ($28000). The quantity bought and sold is 200000 trucks.The foreign automaker receives $28000 per truck after tax.

c) Total quantity of trucks sold = 200000 and the government earns tax of $3000 on each truck.

So, the total tax revenue = 200000 x 3000 = $600 million. This is represented by the shaded area in the diagram.

d) The excise tax will lead to a rise in the price of the imported trucks.The American trucks are substitute goods for imported trucks,so the demand for American made trucks will rise which will increase their price and revenue of American manufacturers.

The buyers will be hurt as It will result into buyers of both domestic and foreign trucks, paying higher prices for trucks because of tax on foreign trucks

Inefficiency arises as some mutually beneficial transaction can no longer occur due to the higher prices for trucks caused by the tax.IT will decrease economic welfare of the people leading to decline in productivity.