Japan has a total ban on imports of foreign rice. Japanese rice consumption is completely dependent on domestic production. The Japanese government claims that this policy protects national security. Assume that Japanese domestic consumption of rice is 1 billion pounds per year and that the current price of rice is $2 per pound. Further assume that the world price of rice is $ 0.25 per pound (delivered to Japan). It is estimated that the price elasticity of demand for rice in Japan is -1.0 while the domestic price elasticity of supply in Japan is 0.5. Suppose that years of international pressure and trade negotiations lead the Japanese to open their rice market to foreign producers of rice. Given the volume of rice production in the world, assume that now the Japanese can buy all of the rice that they want at $0.25 per pound (i.e. the world supply of rice to Japan is perfectly elastic). What will happen to the rice market in Japan? Specifically:
What is the free trade level of rice consumption in Japan?
How much rice do domestic farmers produce in Japan?
How much rice is imported into the Japanese rice market?