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% of domestic production is now produced by newer, nimble and highly efficient mini-mill companies. Foreign imports account for roughly 30% of domestic steel use. In order to stem the tide of rising imports, President George W. Bush announced in 2002 that the United States would introduce up to thirty per cent tariffs on most imported steel products. These measures were to remain in place for three 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 + $0.15Q2
MC =
TC/
Q = $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% following introduction of Bush’s protective tariff.