USA is a large importer of steel from China, South Korea, India and other Eastern European countries. In order to save its ailing domestic steel industry, the USA Department of Commerce has decided to impose import tariffs for imported steel into USA.
(a) Assume that the demand for steel in USA is given by the equation P = 900 – 0.5Q and the supply of steel is given by the equation P = 300 + 0.5Q. Solve for the pre-trade equilibrium price and quantity in USA steel market. Explain and analyse the consumer surplus and producer surplus in USA steel market with a proper diagram.
(5 marks)
(b) At world price and free trade, USA is able to sell its steel at $500 per ton in the domestic market. Summarise and analyse the quantity of steel produced, consumed and imported in USA. Explain and analyse the welfare gain from trade in USA. Show your answers of the steel market with a proper diagram.
(5 marks)
(c) Assume that USA imposes a tariff of $100 per tonne of steel imported into USA. Explain and analyse the quantity of steel produced, consumed and imported in USA steel market after the tariff. Foreign steel exporters to USA have to absorb a 20% of the tariff amount since USA is a large importer that will influence the market price. Show your answers of the steel market with a proper diagram.
(5 marks)
(d) Explain and analyse the effects of the consumer surplus, producer surplus and deadweight loss in the USA steel market with the tariff. What are the terms of trade of the USA steel market after the tariff was imposed?
(5 marks)
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