Problem: The Steel Supply Corporation is an importer and distributor of Taiwanese-made, 96 piece hand-tool sets (screw drivers, wrenches, and the like). The U.S. Commerce Department recently informed the company that it will be subject to a new 25% tariff on the import cost of fabricated steel. The company is concerned that the tariff will slow its sales growth, given the highly competitive nature of the hand-tool market. Relevant market demand and marginal revenue relations are:
P= $80-$0.0001Q
MR= dTR/dQ =$80-$0.0002Q
The company's marginal cost equals import costs of $32 per unit, plus $8 to cover transportation, insurance, and related selling expenses. In addition to these costs, the company's fixed costs, including a normal rate of return, come to $2,500,000 per year on this product.
Question 1. Calculate the optimal price/output combination and economic profits prior to imposition of the tariff.
Question 2. Calculate the optimal price/output combination and economic profits after imposition of the tariff.
Question 3. Compare your answers to parts A and B. Who pays the economic burden of the import tariff?