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Chapter 9: Q8. (page 364)

A particular metal is traded in a highly competitive world market at a world price of \(9 per ounce.

Unlimited quantities are available for import into the United States at this price. The supply of this metal from domestic U.S. mines and mills can be represented by the equation QS = 2/3P, where QS is U.S. output in million ounces and P is the domestic price.

The demand for the metal in the United States is QD = 40 - 2P, where QD is the domestic demand in million ounces.

In recent years the U.S. industry has been protected by a tariff of \)9 per ounce. Under pressure from other foreign governments, the United States plans to reduce this tariff to zero. Threatened by this change, the U.S. industry is seeking a voluntary restraint agreement that would limit imports into the United States to 8 million ounces per year.

a. Under the $9 tariff, what was the U.S. domestic price of the metal?

b. If the United States eliminates the tariff and the voluntary restraint agreement is approved, what will be the U.S. domestic price of the metal?

Short Answer

Expert verified

  1. The U.S. domestic price of the metal is $18 per ounce.

  2. The new U.S. domestic price of the metal will be $12 per ounce.

Step by step solution

01

Step 1. Determining the U.S. domestic price of the metal

The U.S. domestic price of the metal will be the sum of the world price and the tariff price. The domestic price of the metal is calculated below:

Priceofmetal=Worldprice+Tariff=$9+$9=$18

The domestic price of the metal in the U.S. market would be $18 per ounce.

02

Step 2. Determining the U.S. domestic price of metal after the implementation of quota policy

The quota will restrict the quantity of imports to 8 million ounces per year. Since quantity import is equivalent to the quantity of imports, the difference between the quantity demanded and quantity supplied will be the quantity of import.

Import = Quantity demanded (QD) 鈥換uantity supplied (QS). Putting the values of import, QD, and QS, the new price after the quota policy is calculated below:

Import=QD-DS8=40-2P-23P40-8=2P+23PP=12

Thus, the new U.S. domestic price for the metal after implementing the quota policy will be $12 per pound.


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Suppose the market for widgets can be described by the following equations:

Demand: P = 10 - Q

Supply: P = Q 鈥� 4

where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:

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In Exercise 4 in Chapter 2 (page 84), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of \(9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table.

Price

U.S. Supply (Million Pounds)

U.S. Demand (Million Pounds)

3

2

34

6

4

28

9

6

22

12

8

16

15

10

10

18

12

4

Answer the following questions about the U.S. market:

a. Confirm that the demand curve is given by QD = 40 - 2P, and that the supply curve is given by QS = 2/3P.

b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds.

c. If the United States imposes a tariff of \)3 per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?

d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of fiber? What is the gain for U.S. producers?
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