5.5 Malaysia’s monopoly auto manufacturer produces the Proton, which is protected from imports by a specific tariff, t, on imported goods. The monopoly’s profit-maximizing price is p*. The world price of the good (comparable autos) is pw, which is less than p*. Because the price of imported goods with the tariff is pw + t, no foreign goods are imported.

Under WTO pressure the government removes the tariff so that the supply of foreign goods to the country’s consumers is horizontal at pw. Show how much the former monopoly produces and what price it charges. Show who gains and who loses from removing the tariff. (Hint: Look at Solved Problem 11.7.)