Question:

US automakers wanted a quota to be placed on imports of j*p cars. The quota increased profits for j**s. How?

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In the 70s, US automakers pushed for a quota to be placed on imports of Japanese automobiles. The quota was put in place and, somehow resulted in increased profits for Japanese auto companies, despite the decreased quantity sold. Could someone explain to me how this could happen?

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  1. To understand the answer to this question you must be familiar with two basic economic concepts:

    1) The simple supply and demand curve diagram

    2) the elasticity of the demand curve

    Let us begin by using the simple demand and supply curve, where the demand curve is the downward sloping curve, and the supply curve is the upward sloping one.

    An import quota on the Japanese cars would mean a reduction in the number of cars imported into the US. This reduction would lead to lower supply, shifting the supply curve to the left. A new equilibrium will now be found at a higher price and a lower quantity.

    Next, we should be reminded of the fact that the demand for Japanese cars was relatively inelastic. That is to say that since Japanese cars had the technological edge over their American competitors and where still cheaper, an increase in the price of the Japanese cars would not too greatly reduce their demand. Accordingly, the demand curve is inelastic.

    When drawn correctly, the profits lost due to the reduction in the quantity of cars sold, represented by the quadrant between the lower new quantity sold, the original quantity sold prior to the quotas, would be smaller than the additionally earned profits (to be found in the quadrant between the old lower price and the newer higher price), thus proving that de facto the quota on Japanese cars pushed up Japanese car producers' profits.

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