The diagram below shows the domestic demand and supply curves for cotton towels in Canada.The prevailing world price of cotton towels is PW.Assume that all cotton towels are identical.
FIGURE 33-3
-Refer to Figure 33-3.If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2),then foreign producersʹ revenues from their sales in Canada will be equal to the area

Question

The diagram below shows the domestic demand and supply curves for cotton towels in Canada.The prevailing world price of cotton towels is PW.Assume that all cotton towels are identical.
  FIGURE 33-3
-Refer to Figure 33-3.If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2),then foreign producersʹ revenues from their sales in Canada will be equal to the area

Quizplus · Accepted Answer

When the Canadian government imposes a quota on imported cotton towels, the quantity of imported towels decreases from Q3 to Q2. This creates a shortage in the domestic market, and the price of cotton towels in Canada rises to Pw + A (the vertical distance between Q2 and the world price line PW).

Foreign producers can still sell the quota amount (Q3-Q2) of towels in Canada at the higher price, but they lose sales in the amount of (Q3-Q1). So their total revenue from sales in Canada is equal to the area of the green triangle (C) and the blue rectangle (H) in Figure 33-3. This is because the quantity of towels they sell at the higher price is given by the green triangle (C), and the revenue they earn for these sales is the height of the triangle times its base (the price difference between Pw and Pw+A). The quantity of towels they sell at the world price (Q3-Q1) is given by the blue rectangle (H), and the revenue they earn for these sales is the height of the rectangle (Pw) times its base (Q3-Q1).

Therefore, the correct answer is C, which represents the total revenue foreign producers earn from sales in Canada under the quota.

The Diagram Below Shows the Domestic Demand and Supply Curves