Question 1

Refer to the accompanying figure, which shows the annual domestic supply and annual domestic demand for jeans in a small country.  Suppose this country is open to trade with the rest of the world, and the world price of a pair of jeans is $40. If the government imposes a quota on imported jeans of 12,000 pairs per year, then the new equilibrium price of jeans in this country will be:
A)$60
B)$80
C)$100
D)$120

Accepted Answer

The quota can be thought of as a rightward shift in the supply curve by 12,000 pairs of jeans. The new equilibrium price is determined by the intersection of the demand curve and the new supply curve, which, in this case, occurs at a price of $80.

Question 2

The demand for cars in a certain country is given by: D = 20,000 - P, where P is the price of a car. Supply by domestic car producers is: S = 5,000 + 0.5P. If this economy opens to trade while the world price of a car is $6,000, and the government imposes a quota allowing 3,000 cars to be imported, then domestic equilibrium quantity of cars will be ________.
A)6,000
B)8,000
C)10,000
D)12,000

Accepted Answer

With the quota, domestic supply becomes 8,000 + 0.5P. Thus, the new equilibrium price of the quota solves the following: 20,000 - P = 8,000 + 0.5P, implying that P = 8,000. At that price, the domestic equilibrium quantity is 12,000 cars.

Question 3

The demand for cars in a certain country is given by: D = 20,000 - P, where P is the price of a car. Supply by domestic car producers is: S = 5,000 + 0.5P. If this economy opens to trade while the world price of a car is $6,000, and the government imposes a quota allowing 3,000 cars to be imported, then the winners are ________.
A)domestic consumers
B)domestic consumers and import permit holders
C)domestic producers and the government
D)domestic producers and import permit holders

Accepted Answer

Quotas benefit domestic producers and those who have import licenses.

Question 4

Suppose a government is considering imposing either a tariff or a quota on imported grain, and either policy will result in exactly 750 tons of grain being imported. How do these policies differ?
A)The price of grain under the tariff will be higher than the price under the quota.
B)The price of grain under the quota will be higher than the price under the tariff.
C)Domestic production will be higher with the quota than with the tariff.
D)The quota will generate revenue for the firms that hold import licenses, while the tariff will generate revenue for the government.

Accepted Answer

Quotas generate revenue for firms that hold import licenses, while tariffs generate revenue for the government.

Quiz 15: International Trade and Trade Policy

Suppose a government is considering imposing either a tariff or a quota on imported grain, and either policy will result in exactly 750 tons of grain being imported. How do these policies differ?