A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year. The quota on T-shirts causes domestic producers to:

Question

Quizplus · Accepted Answer

Before the quota, domestic production was 10 million T-shirts and domestic consumption was 42 million T-shirts. This means the country was importing 32 million T-shirts (42-10).

After the quota, domestic production increased to 15 million T-shirts and the import limit was 20 million T-shirts. This means the country is importing 5 million T-shirts (20-15).

The domestic price rose from $10 to $12 per T-shirt. This means that domestic producers are now earning an extra $2 per T-shirt.

Therefore, the gain for domestic producers with the quota is calculated as follows:
(15 million T-shirts - 10 million T-shirts) x $2 per T-shirt = $10 million
Plus, the gain from the reduced imports:
5 million T-shirts x $12 per T-shirt = $60 million
Minus, the loss from the extra domestic production:
5 million T-shirts x $5 per T-shirt = $25 million

Total gain for domestic producers = $10 million + $60 million - $25 million = $45 million, which is equivalent to $25 million more than the gain of domestic producers without the quota.

A Small Country Imports T-Shirts