Question

11. Assume the United States is an importer of televisions and there are no trade restrictions. U.S. consumers buy 1 million televisions per year, of which 400,000 are produced domestically and 600,000 are imported.

a. Suppose that a technological advance among Japanese television manufacturers causes the world price of televisions to fall by $100. Draw a graph to show how this change affects the welfare of U.S. consumers and U.S. producers and how it affects total surplus in the United States.

b. After the fall in price, consumers buy 1.2 million televisions, of which 200,000 are produced domestically and 1 million are imported. Calculate the change in consumer surplus, producer surplus, and total surplus from the price reduction.

c. If the government responded by putting a $100 tariff on imported televisions, what would this do? Calculate the revenue that would be raised and the deadweight loss. Would it be a good policy from the standpoint of U.S. welfare? Who might support the policy?

d. Suppose that the fall in price is attributable not to technological advance but to a $100 per television subsidy from the Japanese government to Japanese industry. How would this affect your analysis?

Answer 1

a. When advancement in technology reduces the world price of televisions, the impact on the U.S (Importer of televisions) is depicted in the graph. Initially television's world price is P1, and producer surplus is C + G, consumer surplus is A + B, thus total surplus equals A + B + C + G, and the imports are depicted in the graph as “Import 1”. After the technological advancements, the televisions world price reduces to P2 (which equals P1-100), consumer surplus rises by C + D + E + F, producer surplus is reduced by C, and consequently the total surplus increases by D + E + F, and the imports amount increases to “Import 2 ” as shown in the graph.

	P1	P2	Change
Consumer Surplus	A+B	A+B+C+D+E+F	C+D+E+F
Producer Surplus	C+G	G	-C
Total Surplus	A+B+C+G	A+B+C+D+E+F+G	D+E+F

b. The areas will be computed as:

Area C: [(200,000*$100) + (0.5 *200,000*$100)] = $30 million.

Area D: [0.5 * 200,000 * $100] = $10 million.

Area E: [600,000 * $100] = $60 million.

Area F = [0.5*200,000*$100] = $10 million.

Thus change in producer surplus equals -$30 million.

The change in consumer surplus equals $110 million.

Total surplus increases by $80 million ( = -$30 million + $110 million)

c. When a $100 tariff is imposed on imported televisions by the government then the consumer and producer surplus would return back to initial values. Consequently consumer surplus will decline by areas C + D + E + F (= $110 million). Producer surplus will increase by $30 million. The government would gain tariff revenue for $60 million (=$100 * 600,000). The deadweight loss from the tariff equals D+F (=$20 million). Thus it will not a good policy from the United States standpoint of U.S. welfare as total surplus has declined after the imposition of tariff is but domestic producers will be happier because they gain from the tariff.

d. In our analysis why the world price dropped makes no difference. The decline in the world price is helpful for domestic consumers more but harms domestic producers; however improves the total welfare