Consider the market for motorcycles in France during the 1980s. Supposethat this market is small and initially is perfectly competitive, characterized by thefollowing supply and demand functions:

QS= -4 + P

QD= 20 - P

where P is the price of a motorcycle (all units are denominated in thousands). Thecurrent world price for motorcycles is PW= 7.

i. Under free trade, how many motorcycles will be produced, consumed, and traded in France? What are the values of consumer, producer, andtotal social surplus in this equilibrium?

ii. What happens to the quantities and surpluses derived in part (i) if a specifictariff of t = 2 per motorcycle is imposed?

iii. Would the outcome be different under a quota that guarantees thesame quantity of imports as the tariff?

iv. Will the French government be able to increase revenue by imposinga higher level of import tariffs than in part (ii)? Explain why or why not.

v. France is a member of GATT, so protectionist policies such as quotas or tariffs are not permitted.However,France observes that the U.S. has successfully convinced Japan, a dominant exporter of motorcycles in the world market, to self-impose a voluntary export restraint (VER). The French government decides to pursue the same policy and Japan agrees to a VER of 6. What are thenew values of consumer, producer, and total social surplus under the VER?

vi. In response to the VER, Japanese firms decide to reduce trade costs bymanufacturing motorcycles directly in France. Explain the key factors Japanesefirms would need to consider when relocating the production of motorcycles toFrance.