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4. Effect of quotas on local consumers and producers The following graph shows the U.S. domestic market for toys. 20 O 18 Domestic Supply Domestic Demand 16 0 14 12 Domestic Supply 10 PRICE (Dollars) Price World) Domestic Demand Price quota) 12 18 24 30 36 42 48 54 60 QUANTITY (Millions of toys)In the absence of trade with China. the equilibrium price of a toy is . At this price, both the domestic quantity demanded and the domestic quantity supplied equal \\:| million toys. Suppose that trade between the United States and China is open and that 'die United States initially imposes no tariffs or quotas on toys imported from China. Assume that China has a comparative advantage in producing toys and charges the world price of $6 per toy. (Note: Throughout the problem, assume that the amount demanded by any one country does not affect the world price of toys.) On the graph, use the grey line (star symbol) to indicate the world price of toys. At the world price of $6 per toy, the quantity of toys demanded by U.S. buyers is |:| million toys. the quantity of toys supplied by U.S. manufacturers is E million toys, and the quantity of toys imported from China is \\:| million toys. Suppose now that the United States places a quota on imports of toys from ChinaI which limits imports of Chinese toys to 12 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 v.5. price under the quote. Under the quota, the price of toys is , the quantity supplied by U.S. producers is \\:| million toys, and the quantity demanded by U.S. consumers is \\:| million toys. Compared to conditions under free trade, U.S. manufacturers sell 7 toys and receive 7 price after the imposition of the toy quota, while U.S. consumers buy v toys and pay v price after the imposition of the toy quota. Supporters of the toy quota oyer 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. C] Trade restrictions simply reshufe jobs by increasing employment in the protected industry and reducing employment in other industries. C] China may retaliate, imposing restrictions on their imports from the United States, thereby generating unemployment in U.S. export industries. C] Consumers will likely diyert large amounts of scarce resources toward lobbying for the removal of the quota. C] We costs to domestic toy consumers may outweigh the benets of jobs sayed in the toy industry
