|Question||A particular metal is traded in a highly competitive world market at a world price of $9 per ounce. Unlimited quantities are available for import into the United States at this price. The supply of this metal from domestic U.S. mines and mills can be represented by the equation QS ? 2/3P, where QS is U.S. output in million ounces and P is the domestic price. The demand for the metal in the United States is QD ? 40 ? 2P, where QD is the domestic demand in million ounces.
In recent years the U.S. industry has been protected by a tariff of $9 per ounce. Under pressure from other foreign governments, the United States plans to reduce this tariff to zero. Threatened by this change, the U.S. industry is seeking a voluntary restraint agreement that would limit imports into the United States to 8 million ounces per year.
a. Under the $9 tariff, what was the U.S. domestic price of the metal?
b. If the United States eliminates the tariff and the voluntary restraint agreement is approved, what will be the U.S. domestic price of the metal?