Calculating optimal price and output combination
The Steel Supply Corporation is an importer and distributor
of Taiwanese-made, 96 piece hand-tool sets (screw drivers, wrenches, and the
like). The U.S. Commerce Department recently informed the company that it will
be subject to a new 25% tariff on the import cost of fabricated steel. The
company is concerned that the tariff will slow its sales growth, given the
highly competitive nature of the hand-tool market. Relevant market demand and
marginal revenue relations are:
P= $80-$0.0001Q
MR= dTR/dQ =$80-$0.0002Q
The company’s marginal cost equals import costs of $32 per
unit, plus $8 to cover transportation, insurance, and related selling expenses.
In addition to these costs, the company’s fixed costs, including a normal rate
of return, come to $2,500,000 per year on this product.
A. Calculate the optimal price/output combination and
economic profits prior to imposition of the tariff.
B. Calculate the optimal price/output combination and
economic profits after imposition of the tariff.
C. Compare your answers to parts A and B. Who pays the
economic burden of the import tariff?
