The figure given below shows the domestic demand (D_d) and supply (S_d) curves of mopeds in a country before an import quota is imposed by the government. After the imposition of quota, the total available supply curve becomes S_d + Q_Q. If the government auctions the quota licenses, how much will it collect as revenue?

Question

Quizplus · Accepted Answer

To find the revenue collected by the government through auctioning the quota licenses, we need to first find the quantity of quota licenses that are being auctioned off. This is equal to the difference between the total available supply curve (S_d + Q_Q) and the original supply curve (S_d) at the quota limit. From the graph, we can see that the quota limit is at a quantity of 9 million mopeds. At that point, the original supply curve intersects the demand curve, and the total available supply curve intersects the demand curve at a point that is 3 million mopeds higher (at a quantity of 12 million mopeds). Therefore, the quantity of quota licenses being auctioned off is 3 million mopeds. To find the revenue collected by the government through auctioning these licenses, we can use the formula: Revenue = Quota price x Quantity of quota licenses From the graph, we can see that the equilibrium price of mopeds without the quota is $10.5 per moped. With the quota, the price will increase to $12 per moped (as shown by the new supply curve intersecting the demand curve at a quantity of 9 million mopeds). Therefore, the quota price is $1.5 per moped ($12 - $10.5). The quantity of quota licenses being auctioned off is 3 million mopeds. Revenue = $1.5 x 3 million = $4.5 million However, we need to remember that the quota price is paid by the domestic producers who receive the quota licenses, not by the government. Therefore, the revenue collected by the government through auctioning the licenses is equal to the rent that is generated by the quota. The formula for rent generated by a quota is: Rent = (Quota price - Marginal cost) x Quantity of quota licenses From the graph, we can see that the marginal cost of producing mopeds is $9 per moped (as shown by the original supply curve). Therefore, the rent generated by the quota is: Rent = ($1.5 - $9) x 3 million = -$22.5 million Note that the rent is negative, which means that domestic producers are worse off because of the quota. However, the government still collects this rent as revenue through auctioning the quota licenses. Therefore, the answer is C) $76.5 million.

The Figure Given Below Shows the Domestic Demand (Dd) and Supply

The Figure Given Below Shows the Domestic Demand (D_d) and Supply