Some of the largest import tariffs, the tax on imported...

Some of the largest import tariffs, the tax on imported goods, are on shoes. Strangely, the cheaper the shoes, the higher the tariff. The highest U.S. tariff, $67 \%$, is on a pair of $\$ 3$ canvas sneakers, while the tariff on $\$ 12$ sneakers is $37 \%,$ and that on $\$ 300$ Italian leather imports is $12 \%$ (Blake W. Krueger, "A Shoe Tariff With a Big Footprint," Wall Street Journal, November 22,2012 ). Laura buys either inexpensive, canvas sneakers ( $\$ 3$ before the tariff) or more expensive gym shoes $(\$ 12$ before the tariff) for her many children. Use an indifference curve-budget line analysis to show how imposing these unequal tariffs affects the bundle of shoes that she buys compared to what she would have bought in the absence of tariffs. Can you confidently predict whether she'll buy relatively more expensive gym shoes after the tariff? Why or why not?

Some of the largest import tariffs, the tax on imported goods, are on shoes. Strangely, the cheaper the shoes, the higher the tariff. The highest
U.S. tariff, $67 \%$, is on a pair of $\$ 3$ canvas sneakers, while the tariff on $\$ 12$ sneakers is $37 \%,$ and that on $\$ 300$ Italian leather imports is $12 \%$ (Blake
W. Krueger, "A Shoe Tariff With a Big Footprint," Wall Street Journal, November 22,2012 ). Laura buys either inexpensive, canvas sneakers ( $\$ 3$ before the tariff) or more expensive gym shoes $(\$ 12$ before the tariff) for her many children. Use an indifference curve-budget line analysis to show how imposing these unequal tariffs affects the bundle of shoes that she buys compared to what she would have bought in the absence of tariffs. Can you confidently predict whether she'll buy relatively more expensive gym shoes after the tariff? Why or why not?

Key Concepts

Indifference Curves

Indifference curves represent a consumer’s preferences by showing combinations of two goods between which the consumer is indifferent. They help identify the consumer's optimal choices by illustrating different utility levels, indicating how a consumer is willing to substitute one good for another while maintaining the same overall level of satisfaction.

Budget Constraints

The budget constraint represents all the combinations of two goods that a consumer can purchase given their income and the prices of the goods. It is crucial in consumer choice theory for understanding how price changes, such as those caused by tariffs, shift the line and alter the set of affordable bundles.

Consumer Choice Theory

Consumer choice theory examines how consumers decide to allocate their income among various goods and services based on their preferences and budget limitations. It integrates the concepts of indifference curves and budget lines to explain decision-making processes and the resulting demand for different goods.

Import Tariffs

Import tariffs are taxes imposed on imported goods, which raise the prices of those goods for domestic consumers. They not only generate revenue but also affect the relative prices of goods, potentially altering consumption patterns and the overall welfare of consumers.

Substitution and Income Effects

Substitution effect and income effect are two important components in analyzing how changes in relative prices affect consumer behavior. The substitution effect refers to consumers shifting their consumption towards relatively cheaper goods, while the income effect captures the change in purchasing power due to the price alteration. Together, these effects help predict changes in the consumption mix resulting from tariff-induced price changes.

Transcript

00:01 Some of the largest in the tax imported on goods are on shoes.

00:06 Strangely, the cheaper shoes, the higher the tariff.

00:09 The highest u .s.

00:10 Tariff, 67%, is on a pair of $3 canvas sneakers.

00:13 While the tariff on $12 sneakers is 37%, and that on $300 tall leather imports is 12%.

00:20 A shoe tariff with a big foot imprint.

00:23 Laura buys either inexpensive canvas sneakers $3 before the tariff or more expensive gym shoes $12 before the tariff for her mini -tebris.

00:32 Children.

00:33 Use an indifference curve budget line analysis to show how imposing these unequal tariffs affects the budget, the bundle of shoes that she buys, compared to that she would buy, would have bought in the absence of tariffs.

00:45 Can you confidently predict whether she'll buy relatively more expensive gym shoes after the tariff? why or why not? the budget constraints attempt to identify the combination of goods and services that the consumer can afford with the given budget and given prices of those goods and services.

01:02 For laura, the allocated income of the is $120 to be spent on canvas sneakers at $3 each pair and gym shoes at $12 a pair.

01:10 The graph measures sneakers, canvas sneakers in the absent and gym shoes at the ordinate.

01:17 In this way, the vertical intercept of the budget constraint is 10 gym shoes and the horizontal intercept of the budget constraint is 40 sneakers.

01:26 Suppose that she is currently buying bundelae, at which she buy 16 canvas shoes and six gym shoes.

01:31 So this is before the tariff consumption.

01:35 And we can see here that it's 10 gym shoes if she doesn't buy any canvas sneakers or 40 canvas sneakers if she doesn't buy any gym shoes...

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