Monopoly Suppose that the demand function of Japanese car in the US is given D(p
ID: 1201269 • Letter: M
Question
Monopoly
Suppose that the demand function of Japanese car in the US is given D(p) = 250 - 2p where p is the price of Japanese cars. (1) If the supply schedule is horizontal at a price of $5, what will be the equilibrium number of Japanese cars sold in the US? How much money will people spend in total on Japanese cars? (2) Due to the pressure from American car manufacturers, the US imposes an import duty on Japanese cars in such a way that for every car exported to the US the Japanese manufacturers must pay a tax to the US government of $2. How many Japanese cars will now be sold in the US? At what price? (3) How much revenue will the US government collect with this tariff? (4) Suppose that instead of imposing an import duty, the US government persuades the Japanese government to impose "voluntary export restrictions" on their exports of cars to the US. Suppose that the Japanese agree to restrain their exports by requiring that every car exported to the US 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? (5) How much will a Japanese firm be willing to pay the Japanese government for an export license? To see it, think about what it costs to produce a car and how much it can be sold for if you have an export license. (6) How much will be the Japanese government's total revenue from the sale of export license? (7) How much money will Americans spend on Japanese cars? (8) Why might the Japanese "voluntarily" submit to export controls?Explanation / Answer
Assuming the value of the supply schedule be horizontal at a price of $5,000 rather than $5 and the Japanese manufacturers of paying a tax to the U.S. government be $2,000 rather than $2 for ease, the answers are as follow:-
A) If the supply schedule is horizontal at $5,000, then the equilibrium price = $5,000. Since D(p) = 250 - 2p, D(p) = 250 - 2*5 = 240,000 cars. Americans will spend 240,000*5,000 = $1,200,000,000.
B) The supply schedule shifts upward $2,000, and is horizontal at $7,000. The market price is now $7,000. Hence, D(p) = 250 - 2*7 = 236,000 cars.
C) Revenues to the US government = (tax/car)*no. cars sold = $2,000*236,000 = $472,000,000.
D) D(p) = 250-2p. The Japanese firms will set the price so that D(p) = 236,000. So 250 -2p = 236 Y 2p = 14, and p = 7,000.
E) The firms will be willing to pay $2,000, as they will receive a net of $5,000 per car.
F) ($2,000/car)*236,000 cars = $472,000,000.
G) Americans will spend ($7,000/car)*236,000 cars = $1,652,000,000.
H) The voluntary export controls currently used allow the Japanese to keep all of the extra revenues. In this example, the Japanese would increase revenues by $1,652,000,000 -$1,2000,000,000 = $452,000,000. Since they would be producing 4000 fewer cars, they would decrease costs by $5,000*4,000 = $20,000,000. The total extra surplus for the Japanese manufacturers is thus $452,000,000 + $20,000,000 = $472,000,000. Equivalently, the extra surplus kept by the Japanese = (7-5)*$236,000 = $472,000,000.