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This problem asks you to evaluate (roughly) the welfare e§ects of a tari§when you have data on import levels, import demand elasticity and importsupply elasticity. The rough estimates come from assuming everything is linear.You may draw the curves and label the areas involved in your answer.The data you have is that current imports of cars into the U.S. stand at20 million units and make up half of the total market. Their average price is$10; 000. Moreover, the demand for imports has an elasticity of 1:1: a 10% fall in price will raise import demand by roughly 11%.
a) Assuming that world prices are fixed, i.e. the U.S. is small relative to the world, products are homogeneous, and that U.S. supply is completely inelastic,explain what the effect would be (on producer profits, consumer surplus, and net welfare) of a 11% tariff.
b) Suppose that the supply of imports from the rest of the world has unitary elasticity, how would your answer to a) change? Draw a picture to illustrate your arguments. (Remember that with linear supply, the supply curve that goes though the origin has unitary elasticity)
c) If the U.S. government became more concerned with raising revenue,would you expect tariffs to rise or fall or stay the same? Why?
d) Explain what you understand by the optimum tariff. Must it be less than the revenue maximizing tariff for a large country? Why?
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