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 domestic towel producersʹ revenues 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 domestic towel producersʹ revenues will be equal to the area

Quizplus · Accepted Answer

When the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2), it restricts the quantity of imported cotton towels, and the quantity demanded by Canadian consumers exceeds the quantity supplied by Canadian producers. Therefore, the price of cotton towels will increase from PW to Pw+T.

The new equilibrium point is at E', where the quantity of domestic supply has increased to Q3, and the quantity demanded has decreased to Q1. The Canadian producers receive a higher price Pw+T and sell a quantity of Q3-Q1 towels. The Canadian total revenue of the domestic producers is represented by the areas A+B+E+F+G, where A is the consumer surplus, B is the government revenue, E is the domestic producer surplus, F is the deadweight loss (loss of economic efficiency), and G is the cost of increased production.

Therefore, the area of domestic towel producers' revenues is equal to A+B+E+F+G, which is the same as option C.

The Diagram Below Shows the Domestic Demand and Supply Curves