This question concerns the market for fuel efficient automobiles. For our purposes, we will leave the definition of fuel efficient to the side. We will assume that all fuel efficient automobiles produced in the United States are sold in the United States and that the U.S. imports fuel efficient automobiles. Finally, we will assume that the market for fuel efficient automobiles is perfectly competitive. Assume that the international price for a fuel efficient automobile is $15,000 and that the domestic price, in the absence of trade, would be $20,000. This question concerns the impact of the recent (up to several months ago) substantial increases in the price of a gallon of gasoline on consumer preferences for fuel efficient (versus “not fuel efficient”) automobiles and the implications of those changed preferences for the U.S. companies which have produced, primarily, “not fuel efficient” automobiles. (A) (i) [5 points] Depict graphically the U.S. market for fuel efficient automobiles prior to the recent change in consumer preferences for those automobiles. (ii) [5 points] Identify in the graph, (a) domestic production, (b) the amount imported, (c) and total domestic consumption of fuel efficient automobiles. 2 (B) Suppose that because of the increase in the price of a gasoline, consumers decide that they prefer fuel efficient automobiles over the not fuel efficient automobiles. (i) [5 points] Depict graphically and discuss the impact of this change in consumer preferences on the market for fuel efficient automobiles. (In answering this question, assume that the international price of an efficient automobile remains $15,000.) (ii) [5 points] Discuss the impact of the change in preferences on (a) the amount of fuel efficient automobiles produced domestically, (b) the amount of those automobiles imported, and (c) the amount of those automobiles consumed domestically. (iii) [5 points] Referring to your graphical analysis in part (i), discuss the impact of the change in preferences on domestic consumer and producer surplus. (C) [10 points] Suppose that Congress, in response to lobbying by domestic automobile producers and in light of the change in consumer preferences discussed in part (B), imposes a $2,500 tariff on imported automobiles. Redraw your graph from part (B)(ii) and depict graphically and discuss the impact of the tariff on the domestic market for fuel efficient automobiles. Identify the changes in consumer and producer surplus which arise because of the tariff. (D) [5 points] Suppose that instead of imposing a tariff on imported fuel efficient automobiles, Congress limited the amount of fuel efficient automobiles which could be imported to the amount of automobile imports you identified in part (C). (Note how this is different from part (C). Tariffs are not being collected in this situation. Congress is simply limiting the amount of imports.) Derive (i.e., show graphically and discuss) the domestic market supply curve which reflects the limited amount of fuel efficient automobiles which may be imported. (Remember that the supply curve will identify the amounts of automobiles which are supplied by both domestic and foreign producers at all possible prices.) Discuss the impact of this import limitation on the domestic market price for automobiles, producer surplus and federal government revenues. Reference: Principles of Microeconomics 4th Edition By Mankiw only Chapter 8,9,10,11