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2. (80pts) The following is part of the CNN.com article “Washing machine wars: U.S. backs Whirlpool in trade fight with Samsung,” October 6, 2017. Please read it carefully and answer the questions below.
“Michigan-based Whirlpool has scored a trade victory that could allow President Trump to limit the number of washing machines sold in the U.S. by Samsung and LG. The U.S. International Trade Commission voted 4-0 in Whirlpool’s favor on Thursday, ruling that a “surge” of washing machines from Samsung and LG have seriously injured domestic manufacturers. …. ….. The statue allows the commission to recommend remedies – such as specific tariffs or quotas – to the president. The commission will make its recommendations before the end of the year, and Trump will have roughly two months to consider the panel’s advice.”
Suppose that the U.S. domestic market demand for washing machine is
P =750−2QD. (1)
There is one domestic washing machine producer in the U.S. market with the following individual supply:
P =250+3QdS. (2)
There are two foreign washing machine producers in the U.S. market, each of which has the following individual supply:
P =100+3QfS. (3)
The price of washing machine is expressed in dollars and the quantity is expressed in the number of machine per day. Assume that 1) all producers produce identical products and 2) any producer in this market behaves as a price taker.
- (20pts) Consider the situation in which the U.S. washing machine market is opened to the foreign producers without any trade barrier. Draw a graph of the U.S. washing machine market, label the axes and the curves, and mark in the equilibrium price and quantity. Calculate the market equilibrium price and quantity.
- (20pts) Calculate the consumer surplus, the producer surplus, and the total surplus.
- (20pts) Suppose that the government in this domestic market imposes a tariff of 90 dollars a machine to the foreign suppliers. Calculate the market equilibrium price and quantity.
- (20pts) Graphically demonstrate the effect of the tarriff policy on the welfare of the society (i.e. consumer surplus, producer surplus, and social welfare.) Who are the winners and the losers from this policy?