Question

Suppose the world price for shoes is $32 per pair. Domestic demand and domestic supply are determined by the following equations:

Domestic Demand: p = 120 - 2q

Domestic Supply: p = 20 + 3q where p and q represent price and quantity, respectively

9. What is the net loss to the domestic economy if the above import quota of 30 pairs of shoes is implemented under the arrangement of Voluntary Export Restraint (VER)?

A) $60 B) $120 C) $360 D) $420

10. What is the net loss to the domestic economy if domestic government uses a quota-equivalent tariff rate instead of the import quota of 30 pairs of shoes?

A) $60 B) $120 C) $360 D) $420

Answer 1

9. D) $420
(Import = Demand - Supply
Demand: p = 120 - 2q
So, 2q = 120 - p
So, q = 120/2 - p/2
So, q = 60 - 0.5p
So, qd = 60 - 0.5p = 60 - 0.5(32) = 60 - 16 = 44
Supply = p = 20 + 3q
So, 3q = p - 20
So, qs =. p/3 - 20/3 = 32/3 - 20/3 = 12/3 = 4
Import, M = qd - qs = 44 - 4 = 40

After quota, M' = qd - qs = 30
So, (60 - 0.5p) - (p/3 - 20/3) = 200/3 - 2.5p/3 = 30
So, 200 - 2.5p = 30*3 = 90
So, 2.5p = 200 - 90 = 110
So, p' = 110/2.5 = 44

Net loss = area of trapezium = [(M+M')/2]*(p'-p) = [(40+30)/2]*(44-32) = (35)*12 = 420)

10. A) $60
(Tariff, t = p' - p = 44 - 32 = 12
Tariff revenue = t*M' = 12*30 = 360
Loss of revenue = 420 - 360= 60)