Suppose a binding output quota is imposed in a previously competitive market with free- market equilibrium price and quantity. The result is
A) higher price and lower quantity exchanged.
B) higher price and higher quantity exchanged.
C) no change in price or quantity exchanged.
D) lower price and higher quantity exchanged.
E) lower price and lower quantity exchanged.

Question

Quizplus · Accepted Answer

When a binding output quota is imposed, it restricts the quantity supplied to a level below the free-market equilibrium quantity. This leads to a decrease in quantity exchanged and an increase in price. Therefore, the correct choice is A, which states that there will be a higher price and lower quantity exchanged.

Suppose a Binding Output Quota Is Imposed in a Previously