United States if a policy of “self-sufficiency”

United States if a policy of “self-sufficiency”

a.    (2 Points) What would be the price of steel in the United States if a policy of “self-sufficiency” were established and no imports were allowed?  How

many tons of steel would be produced?

b.    (8 Points) If the world price of steel were $100 per ton and the United States adopted a free-trade policy, identify on the graph and state below how

much steel would be produced in the United States, and how much would be imported.

c.    (8 Points) Show on the graph and determine the dollar magnitudes of the different effects of a 20 percent tariff on steel imports.

Total consumer surplus loss    __________
Redistributive effect        __________
Protective effect            __________
Revenue effect            __________
Consumption effect        __________

d.    (4 Points) Briefly explain whether the United States as a nation would gain or lose in net terms from this tariff, and indicate the magnitude of this

net gain or loss.

2.    Use the following graph to answer the questions below.

a.    (2 Points) Explain how this graph represents the “large-nation model,” rather than the “small-nation model” reflected in Question 1.

b.    (6 Points) Identify on the graph and state the price, the quantity of domestic production, and the quantity of imports that would result from a free-

trade policy.
Please note that an equation for Sd+wis P= 1/3 Q+ 50/3and that Sd+wand Ddcross over each other at a point where P=90 and Q=220.

c.    (8 Points) Suppose now that the United States imposes a specific duty of $20 per ton on imported steel.  Show on the graph how this will affect price,

domestic production, and imports of steel.  Hint: Using Sd+w and Dd equations, you can find a vertical gap between Dd and Sd+wof $20.  Explain why the price will not

rise by the full amount of the tariff.

d.    (8 Points) Show on the graph and determine the dollar magnitudes of the following effects of this tariff:

Total consumer surplus loss    __________
Redistributive effect        __________
Protective effect        __________
Domestic revenue effect    __________
Terms-of-trade effect        __________
Consumption effect        __________

e.    (2 Points) Explain the conditions under which a country might gain from a tariff, and determine whether it would do so in this case.

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