Suppose that the demand function for Japanese cars in the United States is such that annual sales of cars (in thousands of cars) will be 250−2P, where P is the price of Japanese cars in thousands of dollars.
(a) If the supply schedule is horizontal at a price of $5,000 what will be the equilibrium number of Japanese cars sold in the United States? _____ thousand. How much money will Americans spend in total on Japanese cars? _____ billion dollars.
(b) Suppose that in response to pressure from American car manufacturers, the United States imposes an import duty on Japanese cars in such a way that for every car exported to the United States the Japanese manufacturers must pay a tax to the U.S. government of $2,000. How many Japanese automobiles will now be sold in the United States? _____ thousand. At what price will they be sold? _____ thousand dollars.
(c) How much revenue will the U.S. government collect with this tariff? _____ million dollars.
(d) On the graph below, the price paid by American consumers is measured on the vertical axis. Use blue ink to show the demand and supply schedules before the import duty is imposed. After the import duty is imposed, the supply schedule shifts and the demand schedule stays as before. Use red ink to draw the new supply schedule.
(e) Suppose that instead of imposing an import duty, the U.S. government persuades the Japanese government to impose “voluntary export restrictions” on their exports of cars to the United States. Suppose that the Japanese agree to restrain their exports by requiring that every car exported to the United States must have an export license. Suppose further that the Japanese government agrees to issue only 236,000 export licenses and sells these licenses to the Japanese firms. If the Japanese firms know the American demand curve and if they know that only 236,000 Japanese cars will be sold in America, what price will they be able to charge in America for their cars? _____ thousand dollars.
(f) How much will a Japanese firm be willing to pay the Japanese government for an export license? _____ thousand dollars.
(g) How much will be the Japanese government’s total revenue from the sale of export licenses? _____ million dollars.
(h) How much money will Americans spend on Japanese cars? _____ billion dollars.
(i) Why might the Japanese “voluntarily” submit to export controls?