The figure given below shows the market for MP3 players in a small country. D_d and S_d are the domestic demand and domestic supply curves of the MP3 players before the imposition of the quota. (S_d + Q_Q) is the total available domestic supply curve after the quota has been imposed. According to the figure, how much revenue can the government expect to receive if the import licenses are auctioned?

Question

Quizplus · Accepted Answer

Before the imposition of the quota, the equilibrium price was $40 per MP3 player and the equilibrium quantity was 80,000 MP3 players. After the quota has been imposed, the domestic supply curve shifts to the right by the amount of the quota, which is 40,000 MP3 players. The new equilibrium price is $60 per MP3 player and the new equilibrium quantity is 120,000 MP3 players.

Therefore, the government can expect to receive revenue equal to the difference between the world price of $50 per MP3 player (which is the price that domestic consumers would have paid without the quota) and the auction price of import licenses. Since the quota is equal to 40,000 MP3 players, the maximum revenue that the government can receive is:

Revenue = (difference in price) x (quota) = ($50 - $40) x 40,000 = $400,000,000

However, this is the maximum revenue that the government can receive if it auctions off all of the import licenses. The question asks how much revenue the government can expect to receive, which depends on factors such as the number of bidders and their willingness to pay for the licenses. Therefore, the best choice is B, $50 million, which is closest to the maximum revenue that the government can receive but takes into account the uncertainty involved in the auction process.

The Figure Given Below Shows the Market for MP3 Players