Problem Set 8 March 11 & 12 University of Michigan Winter 2010 Economics 101 Microeconomics Econ 101.400 Winter 2010 Question One (a) Consider the domestic market for an imported good. Draw diagrams to show how the following policies will affect quantities produced and consumed, social surplus, consumer surplus, producer surplus and government revenues: i. a tariff of $x/unit imported is imposed ii. a consumption tax of $x/unit consumed is imposed iii. a production subsidy of $x/unit produced is offered Be careful to determine how and why these policies will impact the price that domestic consumers must pay for the good and the price that domestic producers will receive for the good in equilibrium. (b) Compare the effects of the tariff to the effects of imposing the consumption tax and the production subsidy simultaneously. (c) In an effort to encourage free trade, imagine that the members of the World Trade Organization agreed to dismantle all tariff protection of domestic industries in their respective countries. Do you think that such a commitment will necessarily result in freer trade? Are there alternative means by which these nations can support their domestic industries that have the same effects as tariffs? Are there alternative means of supporting local industries that have lower efficiency cost than tariffs? Why do you think that a government might choose to protect its industry using a tariff rather than simply offering a production subsidy? Econ 101.400 Winter 2010 Question Two In lecture, we considered the effects of a quota imposed in the US market for sugar. This form of protection reduced the competition domestic producers faced from lower cost, overseas producers. During the early 1980s, a different type of trade barrier was introduced in the US auto industry. The US urged Japanese auto producers to adopt a voluntary export restraint (VER), where they would voluntarily reduce the quantity of cars exported to the US. The goal of this question is to analyze the effects of this VER in the US domestic auto industry. First draw a supply and demand diagram that shows equilibrium in the US auto market under free trade. Make sure that your diagram shows that the US chooses to import cars in this equilibrium. Next, suppose that Japanese auto producers voluntarily restrict their exports to the US significantly. (For example, imagine all US imports come from Japan and that the Japanese producers restrict exports to the US to half the free?trade level). Show what happens to the domestic price of autos in the US as well as the welfare effects for domestic producers and consumers. How does this VER differ from a quota? Why would Japanese producers have agreed to the VER? chadh Microsoft Word - Econ 101 Winter 2010 Problem Set 7.doc
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