Question

A large country imports salt. With free trade at the world price of $10 per pound, the country's national market is as follows:

Domestic production: 100 million pounds per year

Domestic consumption: 200 million pounds per year

Imports: 100 million pounds per year

The country's government now decides to impose a quota that limits salt imports to 40 million pounds per year. With the import quota in effect, the domestic price rises to $13 per pound but as this is a large country, the world price decreases to $8.

At the world price of $8, domestic production is 80 million pound and domestic consumption is 220 million pounds.

At the new domestic price of $13, domestic production increases to 130 million pounds per year.

The government auctions the rights to import the 40 million pounds.

Answer the following 3 questions according to this information.

How much is the domestic producers gain or loss from the quota?              

245, Gain       

425, Gain       

525, Gain                   

345, Gain

QUESTION 6

How much is the consumer gain or loss?                  

975, Loss                    

555, Loss                    

975, Gain                   

555, Gain

QUESTION 7

What is the government revenue?                 

120                 

200                 

80                   

100

Answer 1

Solution-

Gain in producer surplus = area of the region available to producers as a result of quota

= area of the trapezium so formed

= 0.5*(quota price - old world price)*(new domestic production + old domestic production)

= 0.5*(13 - 10)*(130 M + 100 M)

= 0.5*3*30,000,000 = 45 million

Consumers loose a surplus that they had when price was $10. The loss in CS

= 0.5*(quota price - old world price)*(new domestic demand + old domestic demand)

= 0.5*(13 - 10)*(200 M + 170 M)

= 0.5*3*30,000,000

= 45 million.

Government revenue = quota rent = quotas * difference in world price and quota price

= 40 M * 5

= 200 million.