The market demand and supply functions for imported cars are: Q_D = 800,000 - 5P
ID: 1214111 • Letter: T
Question
The market demand and supply functions for imported cars are: Q_D = 800,000 - 5P and Q_S = 141/6P + 225,000. The legislature is considering a tariff equal to $2,000 per unit to aid domestic car manufacturers. a. If the tariff is implemented, calculate the loss in producer surplus. How many units of cars would be produced domestically with the tariff? Imported? b. Suppose that instead of a tariff, importers agree to voluntarily restrict their imports to this level. If they do and no tariff is implemented, calculate domestic producer surplus in this scenario. c. Do you expect importers will be more in favor of a tariff or a voluntary quota? Explain. Be sure to show your work and explain and graph your results.Explanation / Answer
a.
Producer surplus = PS* = 225,000 (31,478.26 – 2,000) + 0.5(642,608.7 – 225,000)(31,478.26-2000)
= $12,787,797,732
Quantity = 42,608.7
b.PS = 225,000(31,478.26) + 0.5(642,608.7 -225,000)(31,478.26)
= $13,655,406,427
c. they would favor voluntary quota. They could sell the same amount of cars but receive the full price instead the price minus tariff.
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