Macroeconomics 2

This document provides information on various topics related to Macroeconomics 2. It discusses the impact of Trump's tariffs on the US steel industry, Toyota's concerns about tariffs on foreign vehicles, and the effects of tariffs on Harley Davidson. It also explores the concept of externalities and price discrimination in economics. Additionally, it examines the relationship between health insurance costs and labor markets.

MACROECONOMICS 1
Macroeconomics
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MACROECONOMICS 2
Question 1
According to President Trump's tweet, the US steel industry had hit the global headlines
and according to Trump, it was giving new life and seemed to be thriving (Steil & Rocca, 2019).
However, it is after a year following slapping of tariffs by Trump on the imported steel that has
led to the poor performance of the steel industry. The steel industry has been reeling as the steel
prices have declined and currently are at pre-tariff levels. Employment has also become stagnant
a clear indication that the tariffs are not effective. However, if the policies adopted by Trump's
administration were working as scheduled, then the steel industry was anticipated to outdo the
other segments.
The proponents of Trump's tariffs, for instance, the Alliance for American Manufacturing
postulated that more than 12,000 well-paying occupations had been developed or maintained in
both steel and aluminum factories following the implementation of the president's policy in the
first quarter of 2018. They also asserted that vast amounts of investment in the metal mills could
benefit the US in future with the inclusion of the $1 billion that was announced at a US steel
plant at the outskirt of Pittsburgh.
Toyota
According to the head of Toyota in North America, he expressed his concerns and
worries following the imposition of tariffs by Trump on foreign vehicles as this would make it
hard for Toyota to follow through the added $750 million needed in the US investments
(Lobosco, 2019). The head of Toyota went further to assert that it would be challenging as it
would impact the industry in general.
Toyota workers

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The president of Toyota remarked that Trump's latest move with regards to the
administration of global trade war was a significant drawback for the American consumers and
this was a clear indicator that Toyota's investment was not welcomed in the US and also that the
contributions originating from the American employees are not recognized (Long, 2019). The
directive that was issued by the president, however, was providing Japan and the European
Union a window period to have their trade deals renegotiated with the US and this will ensure
that the American automobile industry together with its workforce are protected which means
jobs will not be lost.
Harley Davidson
Trump used tariffs to attack Harley last year when the company announced that it was
planning to shift some of its production located in the US overseas as a strategy to sidestep the
levies by the EU (Bloomberg, 2019). However, Harley Davidson has more than tariffs to blame
for its poor performance. The company seems to struggle on how to attract young bike riders and
instead is planning to provide cheap bikes and sell more of the clothing.
Harley Davidson workers
Harley Davidsons sells motorcycles in the US, and these bikes are manufactured in the
US; however, the units are sold globally with a mix of origins and assembly (Pauly, 2015). With
the EU-associated manufacturing transfer, this will lead to some of the US jobs being lost though
the company never confirmed it. Also, the loss of sales in the EU translates to some workers
losing their positions.
Question 2
` The BP drills could have both positive and negative externalities. Starting with the
positive externalities, both the consumers and the consumers would benefit as the consumers

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would have more access to supply of oil and the producers on the other side will obtain revenues
from the oil exploration (Riley, 2018). The negative externality is that the BP drills would
disrupt the sea species and the marine ecosystem, mainly through the catastrophic effects of oil
spills. According to course theorem, it states that marginal social benefits and the marginal social
costs should be evaluated. In this case, if the MSC is higher, then the viability associated with
resource allocation for such an exchange gets lost.
On the other hand, if MSB is greater than MSC, then this leads to efficiency in resource
allocation. In this case, the MSB associated with drilling activities is greater, making it optimal
to continue with oil exploration. However, there will be adverse impacts related to oil drilling,
and government regulations would have a significant effect as they would create countrywide
awareness.
The case of a neighbor having a loud party translates to the neighbor enjoying the music,
thus gaining satisfaction from it, and this would be his MSB. However, this only adds stress and
disturbance to the surrounding neighbors who may be experiencing stress from the loud party
music, and this is the negative externality. The optimality will arise when the neighbor reduces
the loud music to acceptable limits considered by society. In this case, the coarse theorem can be
utilized to fathom the inefficiency resulting from such resource allocations.
The case of a car that has got safety features leads to MSB being greater than MSC since
the benefits from the usage of the vehicle are more tangible though the costs here are lesser
compared to the benefits associated with safe driving and the safety of passengers. Thus, the
coarse theorem can be used, and the optimality of the allocated be fathomed. In such a case, it is
imperative for government regulation and intervention to be prioritized since its effect is
enormous on society.

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(Source:lumen)
Question 4
Price discrimination
The ongoing debate is gaining momentum where large insurers are favoring the cover of
drug prescriptions where they will bargain the prices charged for a drug that vary based on how
well it functions for some group of insured patients (Loftus, 2015). This matter occurs when
exorbitant cancer drugs that may assist with several types of cancers but works better for one in
specific (Pauly, 2015). This will work well in price discrimination as there will be a difference in
elasticity where the pharmaceutical companies will charge based on the elasticity of demand, low
price will be charged for Tarceva for the lung cancer where demand is an elastic and high price
for pancreatic cancer patients where the demand is inelastic. However, according to benefits
manager from Express Scripts, it would be imperative if the insurers pay less for a Tarceva
among pancreatic cancer patients compared to lung cancer patients. Since there is substantial
evidence from the clinical trials that show that though the drug extends survival in both cases,
the increase is for lung cancer compared to those with pancreatic cancer. However, the reason

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why the price discrimination may not work for different cancer patients is the insurers failing to
provide the sellers of the drug the access to information based on the characteristics of such
patients, for instance, the type of cancer. Also, they need the guarantee that a drug sold at an
affordable low price for a patient of pancreatic cancer will not be applied for a patient of lung
cancer. However, it is thus evident that the insurer is better positioned to maintain the markets
distinct in a manner that the seller may not be able to isolate such markets.
(Source: tutor2u 2018)

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Economic intuition
The additional revenue for drug frims will be more substantial compared to the cost of
manufacturing additional doses of the drug and may transcend the additional health benefits. The
stockholders who are the most Americans will have taken into account the disproportionate
segment of the benefits to society. Thus, a maker of a drug possessing patent could peg the price
for all buyers slightly lower to benefit the buyers and primarily all the gains associated with an
emerging product introduced in the market will all be enjoyed by the seller and the buyers will
be less valued compared to if the drug was never discovered.
Question 3
It is crucial to understand the nexus between costs associated with health insurance and
the labor markets as such understanding is of great importance to policymakers. The magnitude
of the impacts of such a policy requiring employers to pay 100% of the health insurance would
cost employment, remuneration, and the coverage of such health insurance. This depends on the
elasticities associated with the demand and supply in the market for labor, institutional
limitations on wages and compensation benefits, and the extent to which employees prioritize the
increment in health insurance. Since recruiters offer such coverages voluntarily, employees who
value such packages incur the cost of the increase in reduces wages with no accompanying
change in employment and employment expenses. Thus, in this context, where employees
prioritize the insurance policy at their cost increase in the cost of benefits will be offset
completely by reduced wages. Therefore, following the law stipulating all employers to accord
workers 100% health insurance, which is a benefit would raise the cost of employee say maybe
by $ 4 for every hour. If companies were not initially offering such benefits before the policy, the
curve demonstrating the demand for labor would shift down by the same proportion of $4 based

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on unit quantity of labor. This follows the logic that the companies will be unwilling to reward
their workers with a high wage given the move by the government to increase the cost of the
packages.
If the workers give a priority of the benefit by precisely $4 hourly, it means they would
be ready to labor the same proportion for a wage that is less by $4, and this will make the labor
supply curve of to shift down by the same magnitude of $4. Figure 2 demonstrates the labor
market equilibrium. Since both the labor demand and supply curves of shift down by $4, the
equilibrium quantity associated with labor remains unchanged and the rate of wage declines by $
4 and employers and employees are well off prior to any changes. However, if the employees fail
to give a priority to the stipulated benefit, the labor supply curve will not shift down and this will
lead to a decline in the labor rate by less than $ 4.This will make the equilibrium quantity of
labor to decline as demonstrated in diagram 4.In this case the recruiters are worse off since they
will now pay higher total wage plus the benefits for the few workers. Employees are also worse
off since they will be entitled to a reduced wage, and few will be engaged in employment.
Figure 2

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Figure 4

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References
Bloomberg, 2019. Harley-Davidson Profit Wiped Out by Trump Tariffs. [Online]
Available at: http://fortune.com/2019/01/29/harley-davidson-profit-wiped-trump-tariffs/
[Accessed 13 June 2019].
Lobosco, K., 2019. Toyota chief warns that new tariffs could threaten US investment. [Online]
Available at: https://edition.cnn.com/2019/03/15/business/toyota-tariffs-event/index.html
[Accessed 13 March 2019].
Loftus, P., 2015. New Push Ties Cost of Drugs to How Well They Work. [Online]
Available at: https://www.wsj.com/articles/new-push-ties-cost-of-drugs-to-how-well-they-work-
1432684755
[Accessed 13 June 2019].
Long, H., 2019. Trump’s steel tariffs cost U.S. consumers $900,000 for every job created,
experts say. [Online]
Available at: https://www.washingtonpost.com/business/2019/05/07/trumps-steel-tariffs-cost-us-
consumers-every-job-created-experts-say/?noredirect=on&utm_term=.a3c586098044
[Accessed 13 June 2019].
Pauly, M. V., 2015. Pay-for-Performance Is No Miracle Cure. [Online]
Available at: https://ldi.upenn.edu/pay-performance-no-miracle-cure
[Accessed 13 June 2019].
Riley, G., 2018. Externalities - the 4 Key Diagrams. [Online]
Available at: https://www.tutor2u.net/economics/reference/4-key-diagrams-on-externalities
[Accessed 13 June 2019].

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Steil, B. & Rocca, B. D., 2019. Trump’s Tariffs Are Killing American Steel. [Online]
Available at: https://www.cfr.org/blog/trumps-tariffs-are-killing-american-steel
[Accessed 13 June 2019].