GM’s Latest Tariff Hit: $ 1.1 Billion

Answer the following questions to check your understanding of the story.

How do tariffs on imported cars and car parts influence GM’s average costs and marginal cost?

a) Marginal cost, average total cost and average fixed cost increase and average variable cost does not change.

b) Average fixed cost, average total cost, and average variable cost increase and marginal cost does not change.

c) Average variable cost, average total cost and marginal cost increase and average fixed cost does not change.

d) Average total cost and average variable cost increase and marginal cost and average fixed cost do not change.

Wrong! - As GM imports more vehicles or produces more vehicles using imported parts, total variable cost increases. What happens to average variable cost, marginal cost and average fixed cost?

Well Done! - Tariffs increase GM’s total variable cost. Average variable cost—total variable cost per vehicle—increases. Average fixed cost—total fixed cost per vehicle—does not change. Average total cost—the sum of average variable cost and average fixed cost— increases.

Marginal cost—the increase in total cost that results from producing an additional vehicle—increases

Which of the following might be GM’s long-run profit-maximizing response to the tariff?

GM might _____________.

a) close some foreign plants and expand production in some U.S. plants

b) close a U.S. plant and expand production in a foreign plant

c) continue producing the same output in all its plants

d) close its U.S. operations and import all its U.S. sales

Wrong! - In the long run, GM can change the size of its plant to lower costs. With the tariff on imported vehicles and imported vehicle parts, how can GM change its production decisions in foreign and U.S. plants to lower its costs?

That's Right! - In the long run, GM can change the size of its plant. With the tariff on imported vehicles and imported vehicle parts, a long-run decision may be to close some foreign plants and expand production in some U.S. plants to lower costs.

Why hasn’t GM made its long-run profit maximizing decision?

GM has not made its long-run profit maximizing decision because ____________.

a) it is content with its current production decision

b) it employees are unionized

c) it is waiting for its competitors to make similar decisions

d) it is costly and GM doesn’t know how permanent the tariffs will be

Wrong! - Is GM content with its current production decision? Does GM act only when its competitors act? Does it matter if employees are unionized?

Good Job! - GM will make the costly decision to change its plant size when it knows whether tariffs are permanent or temporary.

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