Question

5. Suppose the world price of steel is $120 per ton and that the U.S. can buy all the steel it wants at this price. The daily demand and supply schedules for millions of tons of steel in the U.S. are as follows:

Price ($ p/ton) U.S. Quantity Demanded U.S. Quantity Supplied

110 26 14

120 24 16

130 22 18

140 20 20

150 18 22

1. Draw the Demand and Supply curves.

2. With free trade in steel, what price will Americans pay for steel? How many tons will Americans buy? How much of this will be supplied by American producers? How much will be imported?

3. Suppose the United States imposes a tax of $10 per ton on imported steel. What quantity would Americans buy? How much would be supplied by American producers? imported? How much tax would the government collect?

4. Who is helped/hurt by the import tax?

Answer 1

Demand and Supply curves are draw below.

With free trade in steel, Americans are paying $120 for steel. Americans are buying 24 tons. Out of this, only16 tons are supplied by American producers and remaining 8 tons are imported.

Suppose the United States imposes a tax of $10 per ton on imported steel. This raises the price of steel in domestic market to $130 per ton. At this price, Americans buy 22 tons. Out of this, 18 tons are supplied by American producers and 4 tons are imported. Tax collected by the government is 4*10 = $40

Import tax has hurt consumers who now pay higher price and buy reduced quantity. Import tax helps producers as they receive a higher price and sell more tons of steel