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Quota Diagram Answers

The document discusses the impact of imposing an import quota on a domestic market that was previously engaged in free trade. With free trade, the world price was $10 and domestic supply was 1000 units while demand was 5000 units, with 4000 units imported. The quota reduces imports to 2000 units, raising the domestic price to $12. This benefits domestic producers who gain $14,000 in revenue but hurts consumers and foreign producers, who see losses of 1000 units and $16,000 in revenue respectively due to the higher prices imposed by the quota.

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39 views

Quota Diagram Answers

The document discusses the impact of imposing an import quota on a domestic market that was previously engaged in free trade. With free trade, the world price was $10 and domestic supply was 1000 units while demand was 5000 units, with 4000 units imported. The quota reduces imports to 2000 units, raising the domestic price to $12. This benefits domestic producers who gain $14,000 in revenue but hurts consumers and foreign producers, who see losses of 1000 units and $16,000 in revenue respectively due to the higher prices imposed by the quota.

Uploaded by

zehracanik1234
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Supply and demand

curves in DOMESTIC
MARKET

Calculate the following (with free trade) (Purple Line)


World price (WP): $10 (Lowest price for import competing)

Quantity supplied at WP: 1000 (Following WP to see quantity supplied domestically)

Quantity demanded at WP: 5000 (Following WP to see quantity demanded domestically at


cheaper cost)

Quantity of imports before quota: 4000 (5000-1000: di erence between domestic supply and
demand to meet customer demand is imported)

Domestic supplier revenue before quota: 10 x 1000 = 10 000 (Revenue = world price x quantity)

Overseas producer revenue before the quota: 10 x 4000 = 40 000 (Revenue = world price x
imports)

Calculate the following (after the quota) (Green Line)


Size of quota: 4000 - 2000 = 2000 (number of imports after quota)

Price after quota: $12

Increase in price due to quota: 12 - 10 = $2 (Di erence in WP and Price after subsidy)

Quantity supplied after the quota: 2000 (Following $12 to see quantity supplied domestically)

Quantity of demanded after quota: 4000 (Following $12 to see quantity demanded domestically)

Domestic supplier revenue after quota: 2000 x 12 = 24 000 (Revenue = price after subsidy x
quantity)

Overseas producer revenue after quota: 2000 x 12 = 24 000 (Revenue = price after subsidy x
quantity)
Note: Government makes NO revenue with Quota

Impact of the quota:


Loss in consumer choice: 5000 - 4000 = 1000 (Contraction of demand from purple line to green
line due to price increase)

Gain to domestic producer revenue: 24 000 - 10 000 = 14 000 (revenue before quota at world
price - revenue after quota and increase in price)

Decrease in imports: 4000 - 2000 = 2000 (di erence of imports at WP (purple line) and imports
after quota (green line)

Loss of revenue to foreign producers: 40 000 - 24 000 = 16 000


ff
ff
ff
Supply and demand
curves in DOMESTIC
MARKET

Calculate the following (with free trade) (Purple Line)


World price (WP): $50

Quantity supplied at WP: 100

Quantity demanded at WP: 250

Quantity of imports before quota 150 (250 - 100)

Domestic supplier revenue before quota: 50 x 100 = 5000 (Revenue = price x quantity)

Overseas producer revenue before quota: 150 x 50 = 7500

Calculate the following (after the quota) (Green Line)


Size of quota: 50 (200 - 150)

Price after quota: $70

Increase in price due to the quota: 70 - 50 = $20

Quantity supplied after the quota: 150

Quantity demanded after the quota: 200

Domestic supplier revenue after the quota: 150 x 70 = 10 500

Overseas producer revenue after the quota: 70 x 50 = 3500

Impact of the quota:


Loss in consumer choice: 250 - 200 = 50

Gain to domestic producer revenue: 10 500 - 5000 = 5500

Decrease in imports: 100

Loss of revenue to foreign producers: 7500 - 3500 = 4000

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