Exhibit 19-7

-If the country in Exhibit 19-7 is initially trading without restrictions at a world price of $2.00 and an import quota of 50 units per month is enacted,

Question

Exhibit 19-7
 
-If the country in Exhibit 19-7 is initially trading without restrictions at a world price of $2.00 and an import quota of 50 units per month is enacted,

Quizplus · Accepted Answer

Initially, at the world price of $2.00, the country is importing 25 units per month as shown by the intersection of the world supply and demand curves.

When an import quota of 50 units per month is enacted, the domestic demand of 150 units (shown by the vertical intercept of the domestic demand curve) can be met by domestic production and imports up to 50 units only. This is shown by the intersection of the domestic demand and supply curves at a quantity of 125 units.

Therefore, domestic production will increase from 100 to 125 units per month, and imports will decrease from 25 to 0 units per month. This matches with option D.

Exhibit 19-7 -If the Country in Exhibit 19-7 Is Initially Trading Without