In 1981, Japan imposed a quota on itself for car sales to the United States. The effects were: to restrict consumption from 2.69 million cars in 1981 to 1.91 million; and to raise the average price...

In 1981, Japan imposed a quota on itself for car sales to the United States. The effects were: to restrict consumption from 2.69 million cars in 1981 to 1.91 million; and to raise the average price from $4573 to $4967.

i. Draw the demand curve for Japanese cars and record the pre- and post-quota prices and quantities. (Hint: assume that the demand curve is a straight line linking any two points on the curve.)

ii. By how much did the welfare of American consumers fall by the introduction of the quota? Show this on the diagram.

iii. Of the total reduction in welfare by Americans, how much was offset by a rise in the welfare (‘economic rents’) by Japanese producers obtained by their now earning a higher price? Show this on the diagram.

iv. So how much of the loss in welfare by Americans was a ‘deadweight loss’ (that is, a reduction in welfare that was not matched by a gain by anyone else, whomever they may be)? Show this on the diagram.