Question

The U.S. (Home country) and Japan (Foreign country) are trading with each other in the auto industry. Both are large countries in this market for cars. The U.S. imports cars from Japan.

The U.S. demand curve for cars is given by:             D =210 – 30P

The U.S. supply curve for cars is given by:               S = 30+ 30P

Japan’s demand curve for cars is given by:                D* = 50 – 10P

Japan’s supply curve for cars is given by:                  S* = 30 + 10P

Answer the following questions. Remember to show all your work. Also remember to draw graphs and label them completely.

1. Draw the demand and supply curves for the U.S. and solve for the autarky equilibrium price and quantity of cars in the U.S.
2. Draw the demand and supply curves for Japan and solve for the autarky equilibrium price and quantity of cars in Japan.
3. Derive the Import Demand (MD) curve. Then plot the MD curve on the World Market diagram.
4. Derive the Export Supply (XS) curve. Then plot the XS curve on the World Market diagram in part (c).
5. Solve for the world equilibrium price and quantity of cars.
6. Draw the U.S., World Market, and Japan diagrams side by side. Label the three graphs completely and remember to show the free trade price of cars, and the quantity of imports and exports in free trade.

The U.S. imposes a tariff of $1.50 per unit on car imports.

7. Compute the new world price of cars.
8. Compute the new domestic price of cars (tariff inclusive price of cars) in the U.S.
1. After the tariff is imposed, compute the new quantities of supply, demand, and imports for the U.S.
10. After the tariff is imposed, compute the new quantities of supply, demand, and exports for Japan.
11. Now compute the welfare effects of the tariff for the U.S. In particular, compute the following:

1. The change in the world equilibrium price of cars.
2. The change in Consumer Surplus (CS).
3. The change in Producer Surplus (PS).
4. The change in government revenue.
5. The change in overall welfare.
6. The loss in consumption efficiency.
7. The loss in production efficiency.
8. The loss in total efficiency.
9. Terms of Trade (TOT) gain.
10. Briefly discuss what has happened to the total welfare in the U.S. after imposing the tariff on car imports.

Answer 1

210- 30 P S 30+ 3DP P3 30 120 210 210-30P- 30 p 2 Equilibrium price 3 P 3 quilibum uanty 20 (B Ja pan 50-10 P 30+t0P P 5 1 30 4b 50 50-10P - 30+10f 90 Q= 30+10)= 4-0 --

Equilibriuro Price - Equilibriur Quahiy+0 GImpost Aumand CMp) cunve tor home counhy (Us) (210-30P-(30 +30P) MA Cune = -S 210-30P-30-30P MD 1S0-60P Price 3 MD igo Quavkity Ex port supply ) ume tor toriego counha (Sapan) CDu 30 +10P-50-10P) 30+10P-50+of XSCunve 1 XS= 2-0f-20 XS 2 XS Cumve 20 20 2 6

XS 3 2-5 2 MP 180-60P- 2oP-20 Q=2012.5)-20 50-20=3D =200 200 9.5 2 80 quilibrium pice 2.5 Equilibrun auanhty 30 LKL P XS G 4 4 4 3 25 9 3 1 MP IDoi20 30 200 210 30 180 200 O30 4050 Q 2 DD US woild Jo parn