Consider the color TV problem considered in the class without constraints. Because the companys
assembly plant is located overseas, the Government has imposed a tariff of $25 per unit.
(a) Find the optimal production levels, taking the tariff into consideration. What does the tariff cost the company? How much of this cost is paid directly to the government, and how much represents lost sales?
(b) Would it be worthwhile for the company to relocate production facilities to the U.S. in order to avoid the tariff? Assume that the overseas facility can be leased to another manufacturer for $200,000 per year and that the cost of constructing and operating a new facility in the U.S. would amount to $550,000 annually. The construction costs have been amortized over the expected life of the new facility.
(c) The purpose of the tariff is to motivate manufacturing companies to operate plants in the U.S. What is the minimum tariff that would make it worthwhile for the company to relocate its facility?
(d) Given that the tariff is large enough to motivate the company to move its facility, how important is the actual tariff amount? Consider the sensitivity of both production levels and profit to the amount of the tariff.
Sample Solution
