The demand for silk cloth in the United States is characterized by the equation:

P = 10 - Q/1000,

where Q is yards of silk cloth. U.S. producers of silk will supply silk to the U.S. market based on the equation

P = 4 + Q/200.

The rest of the world will sell as much silk as U.S. consumers will purchase for a price of $3 (Hint: the supply curve for the rest of the world is flat at $3). Answer the following questions.

If there is free trade between the U.S. and the rest of the world:

a. What will be the market price of silk in the United States?

b. How much silk will American consumers purchase?

c. How much silk will American producers sell?

d. How much silk will Americans import from the rest of the world?

e. Show on a graph American consumer surplus and American producer surplus.

In response to demands to buy American, the U.S. government imposes a tariff, a tax on foreign imports, of $2 per yard of silk.

f. What will be the new market price of silk in the United States?

g. How much silk will American consumers now purchase?

h. How much silk will American producers sell?

i. How much silk will Americans import from the rest of the world?

Draw a new graph that allows you to compare the free-trade situation and the tariff situation. Then answer the rest of the questions using areas on the graph.

j. How does American consumer surplus change with the introduction of the tariff?

k. How does American producer surplus change with the introduction of the tariff?

l. What area on the graph signifies a deadweight loss to consumers?

m. What area on the graph shows the revenue from the tariff?

n. Consider the costs of the new American producers who produce silk only after the tariff is in place. What area on the graph shows the amount by which their total costs are higher than the total revenue that foreign producers would receive to produce that same silk?

Say the tariff were raised to $5 per yard of silk.

o. What will be the market price of silk in the U.S.?

p. How much silk will American consumers purchase?

q. How much silk will American producers sell?

r. How much silk will be imported from the rest of the world