Reference no: EM131201412
Question: Consider the small, closed economy of Exurbia. Exurbia produces mittens and the domestic market demand and domestic market supply curves for mittens in Exurbia are as follows where Q is pairs of mittens and P is the price per pair of mittens:
Domestic Demand: Q = 20,000 – 2000P
Domestic Supply: Q = 2000P – 4000
a. For the closed economy of Exurbia calculate the equilibrium price and equilibrium quantity of mittens, as well as the value of consumer surplus (CS) and producer surplus (PS). Then draw and label a graph depicting the closed market for mittens in Exurbia.
b. Now, suppose that the economy of Exurbia opens its mittens market to trade. Furthermore suppose that the world price of mittens is $3 per pair of mittens. Find the level of imports when Exurbia opens this market to trade. In addition find the quantity demanded domestically, the quantity supplied domestically, the value of CS with trade, and the value of PS with trade. Then draw and label a graph depicting the open market for mittens in Exurbia. Is opening this market to trade beneficial for Exurbia? Explain your answer.
c. Now, after opening this market to trade, the government of Exurbia decides to implement a quota in this market. They decide to impose a quota of 2000 pairs of mittens in this market. Find the level of imports when Exurbia opens this market to trade and imposes this quota. In addition find the quantity demanded domestically, the quantity supplied domestically, the value of CS with the quota, the value of PS with the quota, the license holder revenue due to the quota, and the deadweight loss associated with the quota. Then draw and label a graph depicting this quota in the market for mittens in Exurbia.
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