There has been a lot of talk about trade restrictions, in the hopes that such policies...
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There has been a lot of talk about trade restrictions, in the hopes that such policies will encourage production and hence job growth in this country. Economists, generally, are skeptical of policies that reduce or restrict international trade. A historical example can help illustrate some, although not all, of that economic skepticism. In 1980, the United States negotiated a Voluntary Export Restraint Agreement (VER) with Japan. The VER limited Japanese automobile exports to the United States. This drop in supply caused the price of domestically (U.S.) produced autos to rise. Basic stylized data are below. • Price of a typical U.S.-produced car (pre-VER) = $6,000 • Price of a typical U.S.-produced car (post-VER) = S7,00 • Number of U.S.-produced cars sold in United States (pre-VER) = 8 million • Price elasticity of demand for U.S. autos (pre-VER) --1.5 %3D Prices are looscly typical of 1980, in case you're wondering why these cars are so inexpensive. (a) (3 points) Draw a graph showing the consumer surplus before and after the VER. Label the initial pre-VER price and quantity (using the numbers above) and the post-VER price and quantity (you do not yet know post-VER quantity but you know pre-VER quantity) and show the pre-VER consumer surplus, the post-VER consumer surplus, and the change in consumer surplus. (b) (3 points) Use the above data to calculate the change in consumer surplus that resulted from the VER. Assume a linear market demand curve. Also assume that the demand curve does not shift during the period of interest, and that cars are a sufficiently homogenous commodity that you can analyze this with one demand curve. Calculate the change in consumer surplus as a number (the units will be dollars), and show your work. Hint: Recall the definition of elasticity, %AQ AQ 2 P %AP AP O You can calculate, from the data above, the %AP, and you know e, so you can solve for AQ =%AP where the symbol denotes multiplication. Knowing AQ and initial (pre- VER) Q you can calculate post-VER Q. That information is enough to calculate the change in consumer surplus, in dollars. Refer to the graph from part (a) to help you see this. (c) (l point) Baned on your answer above, would consumers be better ofl if imports of automobiles to the United States are restricted? Why or why not? What about workers would U.S. workers be bctier off if inmipons are restricted and instermational trade is Teduced't Explain your answer There has been a lot of talk about trade restrictions, in the hopes that such policies will encourage production and hence job growth in this country. Economists, generally, are skeptical of policies that reduce or restrict international trade. A historical example can help illustrate some, although not all, of that economic skepticism. In 1980, the United States negotiated a Voluntary Export Restraint Agreement (VER) with Japan. The VER limited Japanese automobile exports to the United States. This drop in supply caused the price of domestically (U.S.) produced autos to rise. Basic stylized data are below. • Price of a typical U.S.-produced car (pre-VER) = $6,000 • Price of a typical U.S.-produced car (post-VER) = S7,00 • Number of U.S.-produced cars sold in United States (pre-VER) = 8 million • Price elasticity of demand for U.S. autos (pre-VER) --1.5 %3D Prices are looscly typical of 1980, in case you're wondering why these cars are so inexpensive. (a) (3 points) Draw a graph showing the consumer surplus before and after the VER. Label the initial pre-VER price and quantity (using the numbers above) and the post-VER price and quantity (you do not yet know post-VER quantity but you know pre-VER quantity) and show the pre-VER consumer surplus, the post-VER consumer surplus, and the change in consumer surplus. (b) (3 points) Use the above data to calculate the change in consumer surplus that resulted from the VER. Assume a linear market demand curve. Also assume that the demand curve does not shift during the period of interest, and that cars are a sufficiently homogenous commodity that you can analyze this with one demand curve. Calculate the change in consumer surplus as a number (the units will be dollars), and show your work. Hint: Recall the definition of elasticity, %AQ AQ 2 P %AP AP O You can calculate, from the data above, the %AP, and you know e, so you can solve for AQ =%AP where the symbol denotes multiplication. Knowing AQ and initial (pre- VER) Q you can calculate post-VER Q. That information is enough to calculate the change in consumer surplus, in dollars. Refer to the graph from part (a) to help you see this. (c) (l point) Baned on your answer above, would consumers be better ofl if imports of automobiles to the United States are restricted? Why or why not? What about workers would U.S. workers be bctier off if inmipons are restricted and instermational trade is Teduced't Explain your answer
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a Let Price of a typical USproduced car preVER P1 6000 Price of a typical USprodu... View the full answer
Related Book For
Fundamental Managerial Accounting Concepts
ISBN: 978-0078025655
7th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor-Yi Tsay, Philip Old
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