Question

The U.S. government would like to help the Americar auto industry compete against foreign automaker: that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand anc supply schedules for imported trucks are given in the accompanying table. a. In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? Illustrate with a diagram. b. Assume that the government imposes an excise tax of \(\$ 3,000\) per imported truck. Illustrate the effect of this excise tax in your diagram from part a. How many imported trucks are now purchased and at what price? How much does the foreign automaker receive per truck? c. Calculate the government revenue raised by the excise tax in part b. Illustrate it on your diagram. d. How does the excise tax on imported trucks benefit American automakers? Whom does it hurt? How does inefficiency arise from this government policy?

Short answer

#Answer# a. The equilibrium price and quantity for imported trucks in the absence of government interference are found where the supply and demand curves intersect. This equilibrium point (P*, Q*) can be illustrated on a diagram with price on the vertical axis and quantity on the horizontal axis. b. The excise tax of $3,000 on each imported truck causes the supply curve to shift upwards by $3,000. The new equilibrium point (P', Q') is determined where the new supply curve intersects the demand curve. The price paid by consumers (P'_C) is equal to P', while the price received by foreign automakers (P'_F) is P' - $3,000. c. Government revenue generated by the excise tax is calculated as $3,000 * Q', and it can be represented on the diagram as a rectangle with a base extending from Q* to Q' and a height of the $3,000 excise tax. d. The excise tax on imported trucks benefits American automakers by making foreign trucks more expensive and potentially increasing the demand for domestic trucks. However, it hurts foreign automakers and consumers who must pay higher prices for imported trucks. The inefficiency from this policy leads to a potential deadweight loss, which can be represented on the diagram as a triangle with the tax wedge, having a height of the tax amount and a base being the difference between Q* and Q'.

Step-by-step solution

Find the equilibrium price and quantity

To find the equilibrium price and quantity, we need to find the price level at which the quantity demanded (from the demand schedule) is equal to the quantity supplied (from the supply schedule). Then, the equilibrium price is P* (with P* being the price where the two curves intersect), and the equilibrium quantity is Q* (with Q* being the number of imported trucks at that intersection).

Illustrate the equilibrium with a diagram

On the diagram, plot the demand curve and the supply curve, with the price on the vertical axis and the quantity on the horizontal axis. The point where the two curves intersect represents the equilibrium (P*, Q*). Label this point on the diagram. b.

Analyze the effect of the excise tax and find the new equilibrium

The imposition of a \(3,000 excise tax on each imported truck will lead to a vertical shift upward of the supply curve, since the cost of each truck increases by \)3,000. Find the new equilibrium point by looking for where the new supply curve intersects the demand curve. This point represents the new equilibrium price (P') and quantity (Q').

Calculate the price paid by consumers and price received by foreign automakers

The price paid by consumers (P'_C) will be the new equilibrium price (P'). The price received by the foreign automakers (P'_F) will be P' - $3,000, since the automakers receive the consumer price minus the excise tax.

Illustrate the effect of the excise tax on the diagram from part a

On the diagram from part a, draw the new supply curve shifted upwards by $3,000. Label the new equilibrium point (P', Q') where this new supply curve intersects the demand curve. c.

Calculate government revenue

Government revenue from the excise tax can be calculated as: Revenue = tax per truck * quantity of imported trucks sold = $3,000 * Q'.

Illustrate government revenue on the diagram

On the diagram, government revenue is represented as a rectangle, with the base extending from Q* to Q' on the horizontal axis, and the height being the 3,000$ excise tax. Shade this rectangle in. d.

Discuss the benefits, losers, and inefficiency

The excise tax on imported trucks benefits American automakers by making foreign trucks more expensive, which may lead to higher demand for domestic trucks. The policy hurts foreign automakers and consumers who must pay higher prices for imported trucks. Inefficiency arises since resources may not be allocated optimally, leading to a potential deadweight loss, which can be represented as a triangle on the diagram containing the tax wedge, where the height is the tax amount and the base is the difference of Q* and Q'.