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Profit Maximization and Protective tariffs

In the United States, steel production has remained constant since the 1970s at about 100 million tons per year. Large integrated companies, like U.S. Steel, remain important in the industry, but roughly 50 percent of domestic production is now produced by newer, nimble, and highly efficient mini-mill companies. Foreign imports account for roughly 30 percent of domestic steel use. In order to stem the tide of rising imports, President George W. Bush announced in 2002 that the U.S. would introduce up to 30 percent tariffs on most imported steel products. These measures were to remain in place for 3 years. To show how protective tariffs can help domestic producers, consider the following cost relations for a typical competitor in this vigorously competitive market:

TC = $150,000 + $100Q + $0.15Q^2
MC = dTC/dQ = $100 + $0.3Q

where TC is total cost, MC is marginal cost, and Q is output measured by tons of hot-dipped galvanized steel. Cost figures and output are in thousands.

A. Assume prices are stable in the market, and P=MR=$400. Calculate the profit-maximizing price-output combination and economic profits for a typical producer in competitive market equilibrium.

B. Calculate the profit-maximizing price-output combination and economic profits for a typical producer if domestic market prices rise by 30 percent following introduction of Bush's protective tariff.

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Solution:

A. Assume prices are stable in the market, and P=MR=$400. Calculate the profit-maximizing price-output combination and economic profits for a typical producer in competitive market equilibrium.

In competitive market equilibrium
MC=MR=P
100+0.3Q=400
0.3Q=400-100
0.3Q=300
Q=300/0.3=1000 (in ...

Solution Summary

Solution describes the steps for calculating profit maximizing price-output combination and economic profits for a perfectly competitive firm. It also studies the changes in price-output combination and profits if a 30% tariff is imported on steel products.

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