Assume that the domestic market (USA) for steel can be represented by the following demand and supply equations:
Demand: P = 450 0.5QD
Supply: P = 150 + QS
It might help you to draw out the domestic supply and demand given the equations, but this is not required. Give your answer in parts, as written below:
A) What is the autarky price for steel? How much quantity is supplied and consumed domestically at this price?
B) Now assume a world price of $250. How much is either imported or exported in the US market (give the number and whether these are imports or exported)? What is the net surplus change as a result of allowing for international trade? Who is better off and who is worse off in the domestic economy (as it pertains to the consumption and production of steel).
C) Now assume that the United States is considering a $50 specific tariff on imports of steel. We will assume the US is a small country, and the domestic price of steel jumps up by exactly the tariff. Now, calculate the new level of trade.
D) With the tariff, what is the net change in surplus, relative to free trade? Specify whether this is a loss or gain. Please provide also the change in consumer sutplus, the change in producer surplus, and the tax revenue.
E) Assume that foreign producers decide to eat some of the steel tariff, so that consumer prices in the US only increase by $40 (and there is no retaliation). What happens to the US terms of trade and how does that affect the change in total surplus due to the tariff above (no need to calculate specific numbers again, just give the direction).
