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Homework answers / question archive / 1) US steel manufacturers supply steel according to the market supply function: QS = 20 + P US steel demand is given by: Q = 30 - 4P (a) What is the domestic equilibrium quantity and price? (b) The US government decides to open the steel market to trade
1) US steel manufacturers supply steel according to the market supply function: QS = 20 + P US steel demand is given by: Q = 30 - 4P (a) What is the domestic equilibrium quantity and price? (b) The US government decides to open the steel market to trade. The world price of steel is Pw = 0.5. Assume US production is very small relative to world production such that the world price remains Pw=0.5 even after the US opens to trade. What is the change in domestic consumer surplus and producer surplus? (C) Now suppose the US government decides to restrict imports such that the domestic price is now P=1. What quota would the government need to impose? (d) If the government auctions import permits to foreign producers, what is the maximum amount they would be willing to pay for such permits (in aggregate) given the quota you found in part (c)? (e) Think more broadly about the U.S. economy. Would these changes in consumer and producer surplus be the only effects of imposing a quota relative to free trade? How do such restrictions affect the car industry? Would the steel workers union support such an import quota? How about construction workers? What would happen to the incentives to develop steel substitutes?
