Suppose the US supply and demand curves for automobiles cross at a price of $15,000 but identical automobiles can be purchased from abroad for $10,000.

1. What is the price Americans pay for a car? What price do the US producers feel they are receiving?
2. On a demand and supply diagram show
3. the consumer surplus,
4. (US) producer surplus and
5. iii. the total surplus for Americans.

Now suppose the government offers US consumers a $2,000 subsidy for every domestic car they buy. (buyers of foreign cars receive no such subsidy).

10.On the same demand and supply diagram, show the new consumer surplus, new producer surplus and the new total surplus.

11.According to the efficiency criterion, is it wise for the government to offer this subsidy?