NON TARIFF BARRIERS: Quota

Please do the following exercise from the Text (Chapter 7) on quotes:

P 166: Ex. 9.

Suppose that the domestic demand and supply for hats in a small open economy are given by

Q = 100-P (direct demand)

Q = 50 + 2P (direct supply)

where Q denotes quantity and P represents price.

a.If the world price is $10, what is the trade level of imports under free trade?

b.Suppose the country imposes a quota of 11 units. How much will the domestic price rise? Hint: Find the price after quota(P_quota) S + quota.

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 (voluntary exports restraint) of 11 units with its chief foreign supplier. What are the welfare effects of this policy? Hint CS + PS + GR = - b - d or net welfare loss= deadweight loss if cases i and ii prevail. For case iii (VER), net social welfare = - b - c -d while deadweight loss = - b -d.