Reference no: EM13997419
Initially Country A imports apples because the world price (PW, blue) is below the price that would apply (PA), in the absence of trade, in A; illustrated in diagram 1. Consumer and producer surplus are shaded in green and yellow respectively.
(i) On Diagram 1, show the quantity of domestic production of apples, and the quantity of imports.
Now impose a quota which gives producers the right to import a certain volume of apples. The supply curve for the A market shifts to the right by the amount of the quota. The new supply curve is shown in red in diagram 2; the price in Country A after allocation of the quota rises from PW to P3.
Quantity supplied to the domestic market is now Q3 which comprises [Q1 + (Q3-Q2)] provided by domestic producers, and [Q2-Q1] supplied by the holders of the import quota. In response to the rise in price, Country A consumers’ demand falls from D1 to D2.
(ii) Show the total surplus, before and after the introduction of the quota, on Diagram 2. Explain.
(iii) Show the deadweight loss caused by the imposition of the quota. Explain. (Use the space below).
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