Chapter 1. Chapter 7

Step 1

Work It Out
Work It Out
Chapter 7
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Question

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.

Price of imported truck Quantity of imported trucks (thousands)
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
Table

a. In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? (Do not include decimals in your answers.)

Equilibrium price: $ dlxue+MDBy5K/0u22e1gw+ERNzSqK0Oo

Equilibrium quantity: Y2x7Rp8uOjs= thousand

The equilibrium price without government interference is $30,000, and the equilibrium quantity is 300,000.
What is the equilibrium price of an imported truck? The equilibrium quantity?

Step 2

Question

b. Assume that the government imposes an excise tax of $3,000 per imported truck.

How many imported trucks are now purchased? ygJZKffxRWs= thousand

What is the price? $ TJjIFN8YccjW0id+HnkpxJ4SAjNSdaoR

How much does the foreign automaker receive per truck? $ ZWawoQG9HYvBfJcKsC88RYD38r6ma61Y

A tax of $3,000 per truck puts a wedge between the price paid by consumers, or the demand price ($31,000), and the price received by producers, or the supply price ($28,000). The quantity bought and sold is 200,000 trucks. The foreign automaker receives $28,000 per truck (after tax). For review see section “The Effects of an Excise Tax on Quantities and Prices”.
How many imported trucks are now purchased? What is the price? How much does the foreign automaker receive per truck?

Step 3

Question

c. Calculate the government revenue raised by the excise tax in part b.

Government revenue: $ tNyVlMsMQLoYmWeFHnxT6Q== million

Since 200,000 trucks are sold and the government earns a tax of $3,000 on each truck, the total tax revenue is 200,000 × $3,000 = $600 million. For review see section “The Revenue from an Excise Tax”.
Calculate the government revenue raised by the excise tax in part b.

Step 3

Question

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The excise tax leads to a rise in the price of imported trucks. Since American trucks are substitutes for imported trucks, the effect of the tax is to increase the demand for American-made trucks, which leads to a higher price for them. As a result, buyers of both domestic and foreign trucks pay higher prices because of the tax on foreign trucks. Inefficiency arises because some mutually beneficial transactions no longer occur due to the higher prices for trucks caused by the tax.
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