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Q. Suppose the U.s supply and demand curves for automobile cross at a price of $15,000 but identical automobiles can be purchase from abroad for $10,000. now suppose the government offers a subsidy of $2000 to each American who buys an imported car. Buyers of domestic cars receive no subsidy.
a. Illustrate what price to American pay for domestic cars before the subsidy is offered? Illustrate what is the most an American will be willing to pay for a domestic car after the subsidy is offered?
b. Given your answer to part (a)and given which anyone can buy or sell cars from abroad at the world price of $10,000, explain how many cars will U.S producers need to sell in the United States?
c. Before and after the subsidy is offered, compute the gains to all relevant groups of Americans. Illustrate what is the deadweight loss due to the subsidy?
d. Explain how does your answer change if U.S producers are prohibited from selling cars abroad?
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