Question

Suppose the Trump administration was to impose import quotas on foreign steel which effectively reduces the amount of steel that foreign producers can sell in the U.S.  

1. On a supply/demand graph show how this policy would affect the domestic steel market.
2. On a separate supply/demand graph show how this policy would affect the domestic automobile market.

Answer 1

Let us suppose that S and D are the domestic supply and demand curves. P1 is the world price line. With the free trade, the domestic producers produced till point B.

Now, the government imposes a quota of Q1Q2. Due to this, the price gets raised. The quota increases the doemstic production from point B to point A.

Now, the quota leads to the rise in price of steel. Steel is the major input used in automobiles. When the price of inputs used in automobiles will rise, it will lead to lesser supply at the existing prices. Due to this, the supply curve shifts backwards. The prices rise and the equilibrium quantity decreases.