Suppose that the domestic demand and supply for hats in a small open economy are given by.
Question:
Suppose that the domestic demand and supply for hats in a small open economy are given by.
where Q denotes quantity and P denotes price.
a. If the world price is 10, what is the free trade level of imports?
b. Suppose that the country imposes a quota of 4 units. How much will the domestic price rise?
c. What will be the welfare effects on this country of a quota of 11 units?
d. Suppose instead that this country negotiates a VER of 11 units with its chief foreign supplier.
What are the welfare effects of this policy?
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