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4. Effect of quotas on local consumers and producers The following graph shows the U.S. domestic market for towels. 10 Domestic Demand Domestic Supply 9 Price (World) 6 Price (Quota) PRICE (Dollars) N 0 6 12 18 24 30 QUANTITY (Millions of towels) In the absence of foreign trade , the equilibrium price of a towel is $ . At this price, both the domestic quantity demanded and the domestic quantity supplied equal million towels.Suppose that trade between the United States and China is open and that the United States initially imposes no tariffs or quotas on towels imported from China. Assume that China has a comparative advantage in producing towels and charges the world price of $3 per towel. (Note: Throughout the problem, assume that the amount demanded by any one country does not affect the world price of towels.) On the previous graph, use the grey line (star symbol) to indicate the world price of towels. At the world price of $3 per towel, the quantity of towels demanded by U.S. buyers is million towels, the quantity of towels supplied by U.S. manufacturers is million towels, and the quantity of towels imported from China is million towels. Suppose now that the United States places a quota on imports of towels from China, which limits imports of Chinese towels to 6 million. (Hint: The original domestic supply curve represents domestic production only.) On the previous graph, use the purple line (diamond symbol) to indicate the new U.S. price under the quota. Under the quota, the price of towels is , the quantity supplied by U.S. producers is million towels, and the quantity demanded by U.S. consumers is million towels. Compared to conditions under free trade, U.S. manufacturers sell Y towels and receive Y price after the imposition of the towel quota, while U.S. consumers buy V towels and pay Y price after the imposition of the towel quota. Supporters of the towel quota over free trade argue that the trade restriction will save jobs in the United States. What are the potential pitfalls of such an argument? Check all that apply. China may retaliate, imposing restrictions on exports from the United States, thereby generating unemployment in U.S. export industries. Consumers will likely divert large amounts of scarce resources toward lobbying for the removal of the quota. The costs to domestic towel consumers may outweigh the benefits of jobs saved in the towel industry. Trade restrictions simply reshuffle jobs by increasing employment in the protected industry and reducing employment in other industries.