Question

Suppose that the world price of cars is less than the domestic market equilibrium price in Italy. Further, suppose that the government decides to impose an import quota to decrease the number of cars imported into Italy.

A. Using a graph, demonstrate the effect of the quota on the quantity demanded and supplied domestically and the equilibrium price, compared to the market equilibrium with free trade.

B. Illustrate on your graph the area that represents lost consumer surplus due to the quota.

C. Label on the graph and explain how the lost consumer surplus is (or is not) distributed to others in the economy.

(You can draw the graph, take a picture and attach it here. Please do *not* take a picture of your hand-written answer, it is much easier for your marker to read typed text)

Answer 1