Final answer:
A 15 percent tax on each imported item is an ad valorem tariff. By reducing tariffs on imported flat screen televisions, the equilibrium price is likely to fall, and the equilibrium quantity is expected to increase due to lower costs and increased demand.
Step-by-step explanation:
The tax of 15 percent per imported item is an example of an ad valorem tariff, which is a tax levied on goods based on a set percentage of their value. This contrasts with a specific tariff, which is a fixed fee based on a physical measure such as weight or quantity, regardless of the value.
How Tariff Reduction Affects Equilibrium Price and Quantity
When the U.S. government cuts the tariff on imported flat screen televisions, we can use a four-step analysis to determine the effect on the equilibrium price and quantity:
- Demand Side: As the tariff is reduced, imported flat screen TVs become cheaper for consumers in the U.S., potentially increasing demand.
- Supply Side: Foreign suppliers are more incentivized to export to the U.S. as their products become more competitively priced.
- Equilibrium Price: With the increase in supply and potentially higher demand, the market equilibrium price is likely to fall.
- Equilibrium Quantity: The quantity of flat screen TVs sold in the market is expected to increase due to the lowered cost and increased consumption.
This basic analysis assumes that demand for flat screen TVs is price elastic and that the market is competitive, allowing the change in tariffs to pass through to consumers in the form of different prices and quantities.