This problem asks you to analyze the effects of a tariff on motorcycles. The table below summarizes situations in the market both with and without the tariff. You may assume that transportation costs are zero and that supply and demand curves are linear.
|
Situation with Tariff
|
Situation without Tariff
|
|
| World Price of a Motorcycle |
$2,500
|
$2,500
|
| Tariff per Unit |
500
|
0 |
| Price of a Motorcycle in U.S. |
3,000
|
2,500
|
| Number of Motorcycles Bought in U.S. per Year |
50,000
|
60,000
|
|
Number of Motorcycles Made in U.S. per Year |
25,000
|
20,000
|
|
Number of Motorcycles Imported into U.S. per Year |
25,000
|
40,000
|
(a) Represent the effects of the tariff in a graph, showing the free-trade equilibrium and the tariff equilibrium in terms of consumption, domestic production, imports, and domestic and world prices.
(b) Estimate the loss of domestic consumer surplus from the imposition of the tariff.
(c) Estimate the gain to domestic motorcycle producers from the imposition of the tariff.
(d) Estimate the gain to the domestic government in the form of revenue from the imposition of the tariff.
(e) Estimate the net effect on the welfare of U.S. residents from the imposition of the tariff.
NOTE: You must support your estimates with calculations and graphs.
Answer questions (a) through (e) above for the following situations.
|
Situation with Tariff
|
Situation without Tariff
|
|
| World Price of a Motorcycle |
$2,000
|
$2,500
|
| Tariff per Unit |
1,000
|
0 |
| Price of a Motorcycle in U.S. |
3,000
|
2,500
|
| Number of Motorcycles Bought in U.S. per Year |
50,000
|
60,000
|
|
Number of Motorcycles Made in U.S. per Year |
25,000
|
20,000
|
|
Number of Motorcycles Imported into U.S. per Year |
25,000
|
40,000
|
NOTE: You must support your estimates with calculations
and graphs.