Figure: Supply and Demand at Home (Figure: Supply and Demand at Home) Which line describes the new
MR curve after the quota is imposed?

Question

Figure: Supply and Demand at Home  (Figure: Supply and Demand at Home) Which line describes the new
MR curve after the quota is imposed?

Quizplus · Accepted Answer

The new MR curve will be the horizontal line at the price equal to the quota rent (PQ) because the domestic producer can sell all the output produced at the quota price due to the restriction on imports. The equilibrium quantity will decrease to Q2, and the domestic producer surplus will increase to the shaded area A + B + C + D. Therefore, the best choice is to impose the quota if the goal is to protect domestic producers from import competition. However, this policy will generate deadweight loss (area E) because it prevents mutually beneficial trades between domestic consumers and foreign producers at the lower world price.