Question

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVs?

Short answer

The demand for flat-screen televisions will increase.

Step-by-step solution

Concept

The four-step analysis is:

1. Draw an original supply and demand curve graph.
2. Examine that the event affects either the demand curve or the supply curve.
3. The effect is positive or negative to the demand or supply curve.
4. Illustrate the new equilibrium price and quantity.

Explanation

Given that the U.S. government cuts the tariff on imported flat-screen televisions. Showing the change through a four-step analysis:

1. Draw an original supply and demand curve graph for the imported flat-screen televisions.

Above Fig 1 shows the supply and demand curve for the imported flat-screen televisions.

2. When the government cuts the tariff then the demand curve is being affected.

3. When the government cuts the tariff it gives a rightward shift to the demand curve as a tariff is a tax on imported goods. Below, the Fig2 shows the positive shift of the demand curve from D to D¹

4. As shown below in Fig 2 the equilibrium point changes from E to E¹ due to which the equilibrium quantity increases from Q to Q¹ and the equilibrium price increases from P to P¹