Question

Suppose that the U.S. Congress passes legislation that imposes a one-time lump-sum tariff on the product that a foreign firm exports to the United States.

a. What happens to the foreign firm’s marginal cost curve as a result of the lump-sum tariff?

b. Will the lump-sum tariff cause the foreign firm to export more or less of the good? Explain carefully.

Short answer

1. No change in the firm’s marginal cost curve.
2. Only if the lump-sum tariff makes selling their goods in the domestic market unprofitable will the foreign company reduce its exports.

Step-by-step solution

Explanation for subpart a.

1. Once the lump-sum tariff is implemented, the firm's marginal cost curve will remain unchanged because the importer must pay the same tariff amount regardless of how many products it brings into the domestic market.

Explanation for subpart b.

1. The foreign company will reduce its exports only if the lump-sum tariff renders selling their goods in the domestic market unprofitable. Because the lump-sum tariff merely increases a foreign firm's average expenses, if the supplied price on the domestic market is sufficient to cover these costs, the company will not reduce their product's export to the domestic market, regardless of the tax imposed.