Consider a small open economy of Jamaica whose domestic supply and demand of rum is as follows.

Demand:Q= 1329P

Supply:Q= 7P28

where quantity is in thousands of crates and price is in Jamaican dollars (J$).

i) What are the equilibrium price and quantity in autarky?

ii) Now suppose the world price of rum isJ$ 6. In an attempt to protect local rum producers, the government imposes a quota of 32 thousand crates on imports of rum. The government gives away the quota licenses to domestic producers.

a) What will the local price of a crate of rum be, given the quota?

b) How does the producer surplus under the quota compare to the free trade out- come?

Hint: Calculate the difference before and after the quota was imposed.

c) What is the value of the production deadweight cost associated with the quota?