Question

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 consumers to

A) gain $7 million.

B) lose $7 million.

C) lose $70 million.

D) lose $77 million

Answer 1

When P = $10, domestic quantity demanded = 42 million T-shirts per year

When P = $12, domestic quantity demanded = Domestic production + Quota = 15 million + 20 million = 35 million T-shirts per year

Loss in consumer surplus = Area of the shaded trapezium = 0.5 * (Sum of the lengths of the parallel sides) * Distance between the parallel sides = 0.5*(35 million + 42 million) * ($12-$10) = 0.5 * 77 million * $2 = $77 million

Ans: D) lose $77 million