ECON 198 – American auto industry compete against foreign

Subject: Economics / General Economics
2. The U.S. government would like to help the American auto industry compete against foreign automakers 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 and supply schedules for imported trucks are given in the accompanying table.

Quantity of imported trucks (thousands)

Price of imported truck Quantity demanded Quantity supplied

$32,000 100 400

31,000 200 350

30,000 300 300

29,000 400 250

28,000 500 200

27,000 600 150

In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? Illustrate with a diagram.
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?
Calculate the government revenue raised by the excise tax in part b. Illustrate it on your diagram.
How does the excise tax on imported trucks benefit American automakers? Whom does it hurt? How does inefficiency arise from this government policy?

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