Question

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVs?

a) Equilibrium price will increase, quantity will decrease.

b) Equilibrium price will decrease, quantity will increase.

c) Equilibrium price and quantity both increase.

d) Equilibrium price and quantity both decrease.

Answer 1

A tariff reduction on imported flat screen TVs will decrease the equilibrium price and increase the equilibrium quantity.

Step-by-step explanation:

In this scenario, a tariff reduction on imported flat screen televisions will affect the equilibrium price and quantity as follows:

1. Step 1: Draw the graph with the initial supply and demand curves, labeling the initial equilibrium price and quantity.
2. Step 2: Determine whether the event affects supply or demand. In this case, a tariff is treated like a cost of production, so it affects supply.
3. Step 3: A tariff reduction decreases the cost of production, resulting in a rightward (or downward) shift in supply.
4. Step 4: With the rightward shift in supply, the equilibrium price will decrease and the equilibrium quantity will increase.

Therefore, the correct answer is b) Equilibrium price will decrease, quantity will increase.