Suppose the US imposed a tariff of $5000 on auto imports for national security reasons. Cars cost $20,000 each (wholesale price) with free trade. Assume that the US is a small country and that auto markets are perfectly competitive (neither is true but these assumptions make the problem simpler.) The US domestic demand for autos in millions of cars is QD = 25 0.5 P, where P is in thousands of dollars. The domestic supply is QS = -5 + 0.5 P.

a. What are consumption, production, imports, and price with no tariff?

b. With a tariff, calculate consumption, production, imports, domestic price, and tariff revenues?

c. How much will consumer and producer surplus and total welfare change if the tariff is imposed?

d. Each domestic auto worker can make 5 cars in a year. How many jobs will be created by imposing the tariff?

e. What is the cost in deadweight loss per job created?

f. What is the lost consumer surplus per job created?

g. If a quota is substituted for the $5000 tariff, what size quota will leave prices unchanged from what they would be with the tariff?

h. Draw and label a diagram that shows prices and quantities.