Impact of Tariffs on Prices
The immediate impact of tariffs is that they increase the prices of imported products. Thus, local producers are not forced to reduce the prices of their goods as a result of increased competition. Besides, tariffs leave domestic consumers paying higher prices because importing goods in the country is highly-priced. Tariffs reduce general efficiencies by facilitating existing companies to remain competitive in the market (Helpman, 2011). For example, figure 1 below illustrates a country with no tariffs where the domestic supply (DS) is compared with domestic demand (DD). Without tariffs, the price of commodities in the domestic market found a price P and the price in the global market is P*. Thus, lowing the domestic prices forces domestic consumers to consume quantity Qw. However, the domestic country cannot produce more than Qd and is forced to import Qw-Qd.
Figure 1: the price of goods without tariffs
The impact of tariffs on prices is quite clear as illustrated in figure 2. Tariffs increase prices of imports thereby forcing importers to reduce the value of imports (Helpman, 2011). Thus, when tariffs are used, prices increases from P* to P. Increase on price forces domestic companies to produce locally thereby shifting Qd to the right. On the other hand, Qw shifts to the left and the imports reduce drastically. Besides, domestic production increases thereby increasing consumer prices.
Figure 1: the price of goods with tariffs
Pros and Cons of Tariffs
Pros
There are several advantages of using tariffs in the economy. First, tariffs protect local industries from the unfavorable competition that cause them to collapse. Thus, tariffs are used to prevent the importation of cheap products. Secondly, tariffs save local jobs and prevent economic dumping because cheaper foreign goods are restricted in the domestic market. Next, tariffs encourage a fair play between trading countries where industries grow at the same rate (Helpman, 2011). Also, tariffs are used to create employment by motivating local investors to manufacture goods locally. Besides, tariffs are used by governments to strengthen the local economy through incentives used to promote local production. More importantly, tariffs are used to reduce the economic deficit of a country by limiting the infiltration of foreign goods and services into domestic markets. Overall, tariffs are used to restrict the importation of undesirable products and services, used to generate additional revenue by governments, and in economic expansion.
Cons
There are several cons associated with tariffs. First, they increase taxation on goods and services on imports thereby increasing prices. Secondly, tariffs discourage importation thereby creating a shortage of goods and services in the market. International trade is also discouraged through the use of tariffs thereby limiting international cooperation and integration (Helpman, 2011). Besides, the use of tariffs reduces the quality of products and services offered to consumers in the market because the level of competition in the market is immaterial. Importation of products and services become unbearable because the costs of imports are quite high. Overall, tariffs discourage foreign investment and competition, affects international relations, and affects the economy negatively.
Part 2
Question 2
Each price elasticity can be interpreted based on the demand offered. Price elasticity of demand is vested in the idea of versatility. Thus, versatility is essential in understanding the motive of the drivers. Through versatility, it is easy to estimate the level of responsiveness of the interest for air travel based on changes on variables such as price elasticity, costs in the first class, unrestricted coach, and restricted discount coach.
The price elasticity of demand for first-class (-1.3) implies that a 10% expansion value prompts a 13% decrease in the dimension of interest of movement across-country trip as long as the marginal costs remain $120 (Helpman, 2011). The price elasticity of demand for unrestricted coach (-1.4) implies that a 10% expansion value prompts a 14% decrease in the dimension of interest of movement across-country trip as long as the marginal costs remain $120. The price elasticity of demand for restricted discount coach (-1.9) implies that a 10% expansion value prompts a 19% decrease in the dimension of interest of movement across-country trip as long as the marginal costs remain $120.
Question 3
a. The firm’s total profit function.
Total Revenue (TR) = P1Q1 + P2Q2 = 100Q1 – 2(Q1) ^2 + 80Q2 – (Q2) ^2
Total Cost (TC) = 20 +4(Q1+Q2)
Total profit function = TR-TC
Profit = TR – TC = p1Q1 +P2Q2 – (20 + 4(Q1+Q2))
= (100-2Q1) Q1 + (80-Q2) Q2 – 20 – 4(Q1+Q2)
= 100Q1 – 2(Q1) ^2 + 80Q2 – (Q2) ^2 – 20 – 4Q1 – 4Q2
Total profit function = 96Q1 – 2(Q1) ^2 + 76Q2 – (Q2) ^2 – 20
b. The profit-maximizing levels of price and output for the two freight categories.
The price maximization level of price and output is when the change in total cost equals a change in total revenue.
The price maximization level of price and output is (TC=TR)
20 +4(Q1+Q2) = 100Q1 – 2(Q1) ^2 + 80Q2 – (Q2) ^2
20 +4Q1+4Q2 = 100Q1 – 2(Q1) ^2 + 80Q2 – (Q2) ^2
4+4 = 100-4 Q1 + 80-2Q2
4 Q1+2Q2= 172
2Q1+Q2= 86
c. The marginal revenue in each market at these levels of output
The marginal revenue = change in total revenue/ change in output
Thus, we differentiate the function of total revenue in respect to output.
For manufacture items, MC = change in total revenue in respect to Q1
MC = 100 – 4(Q1)
For semi-manufactured raw materials, MC = change in total revenue in respect to Q2
MC = 80 – 2(Q2)
d. Total profits in the United States when different prices are charged in the two markets.
Total profit when charging different prices is when MC for the first market equal MC for market two.
80 – 2(Q2) = 100 – 4(Q1)
Total cost = 4(Q1) – 2(Q2) =20
Total cost = 2(Q1) – (Q2) =10
e. The new profit-maximizing level of price and output when the United States is required by law to charge the same per-ton rate to all users
The price maximization level of price and output is when change in total cost and change in total rev revenue in respect to Q1
20 +4(Q1+Q2) = 100Q1 – 2(Q1) ^2 + 80Q2 – (Q2) ^2
20 +4Q1+4Q2 = 100Q1 – 2(Q1) ^2 + 80Q2 – (Q2) ^2
20 +4Q2 = 96Q1-2(Q1) ^2 + 80Q2 – (Q2) ^2
0 = 96-4Q1
4Q1=96
Q1= 24
Question 6
1. Possible rationales for charging different prices for different courses of study.
To determine the possible rationale, the forces of demand mechanism can be used where colleges and universities can charge different prices to students pursuing different courses (Kelchen, 2018). Thus, students pursuing highly demanded courses should be charged a higher price. On the other hand, the lower price should be charged to students pursuing courses with low demand.
2. The income-distribution effects of a pricing scheme that charges the same fee to all students.
Charging the same fee to all students reduces price discrimination based on income-distribution status. Therefore, the students are charged the same fee regardless of whether they are from low-income, middle-income, or high-income families (Kelchen, 2018). Thus, the homogeneous preferences in the pricing scheme will promote equality because the college will set the average price that every student will afford.
3. The impact on the efficiency of resource allocations within the university if universities adopted a system of full-cost (or marginal cost) pricing for various courses.
In case universities use full-cost pricing scheme, then it should be used in both the private and public areas to avoid negative externality caused by the disparity in the marginal private cost and marginal public cost (Kelchen, 2018). Thus, adopting a full-cost pricing scheme will enhance the efficiency of resource allocation in the university because the marginal private cost and marginal public cost will be at equilibrium.
4. Would you complain less about large lecture sections taught by graduate students if these were priced significantly lower than small seminars taught by outstanding scholars?
I would complain less because the price disparities are not based on the same service. Ideally, price disparity is damaging if the same service is charged differently by different providers (Kelchen, 2018). Thus, charging different prices in the lecture section and in small seminars is not complicated and there is no risk involved in terms of prices.
5. What problems could you see arising from a university that adopted such a pricing scheme?
Adopting a full cost pricing scheme can create problems in pricing university education. First, the pricing scheme ignores the competition. There are many universities offering a similar course. Therefore, some universities tend to charge lower prices than others on the same course (Kelchen, 2018). Thus, there will be no competition in terms of quality of education. Besides, full cost pricing scheme ignores price elasticity where the university may charge to high or too low prices than what the students are willing to pay.
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