Suppose the U.S. supply and demand curves for automobiles cross at a price of $15,000 but (identical) automobiles can be purchased from abroad for $10,000. Now suppose the government offers a subsidy of $2,000 to each American who buys an imported car. Buyers of domestic cars receive no subsidy.
a. What price do Americans pay for domestic cars before the subsidy is offered? What is the most an American will pay for a domestic car after the subsidy is offered?
b. Given your answer to part (a), and given that anyone can buy or sell cars abroad at the world price of $10,000, how many cars will U.S. producers want to sell in the United States?
c. Before and after the subsidy is offered, calculate the gains to all relevant groups of Americans. What is the deadweight loss due to the subsidy?
d. How does your answer change if U.S. producers are prohibited from selling cars abroad?