Oligopoly, Increasing Returns, Tariffs and FD/. Recall from Chapter 3 that one motivation for setting up a
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(a) Compute the equilibrium in the U.S. market under free trade, taking the transport costs into account.
(b) Now, do the same under the assumption that the U.S. government imposes a tariff high enough to induce Toyota to set up a U.S. plant.
(c) Taking into account consumer surplus, GM profit, and tariff revenue, what is the effect of the tariff described in part (b) on U.S. welfare?
(d) Usually, a tariff on an imported product raises the domestic price of that product, lowering consumer surplus. Is that true of this tariff? Explain.
(e) Usually, a tariff on an imported product raises the income of domestic producers of that product. Is that true of this tariff? Explain.
(f) Does this example suggest that a tariff to encourage FDI is an attractive strategy? Explain.
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