Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 and that (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers a $2,000 subsidy to every American who buys a car (regardless of whether the car is foreign or domestic).
a. At what prices do U.S. producers sell their cars before and after the subsidy is offered? What prices do U.S. consumers feel like they are paying before and after the subsidy is offered?
b. Before and after the subsidy is offered, calculate the gains to all relevant groups of Americans. What is the deadweight loss due to the subsidy?