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. If the government auctions the import licenses, the quota on MP3 players will result in a(n) _____ in the national well-being by_____.

Question

Quizplus · Accepted Answer

The imposition of the quota leads to a decrease in the quantity demanded and an increase in the quantity supplied at the given price. Due to the shortage created by the quota, the price of MP3 players increases from P1 to P2. This increase in price creates a deadweight loss area of $35 million (triangular area between S_d and D_d at Q2). Therefore, the quota leads to a decrease in national well-being by $35 million.

The Figure Given Below Shows the Market for MP3 Players