Question

Consider a competitive market served by many domestic and foreign firms. The domestic demand for these firms’ product is Qd = 700 - 1.5P. The supply function of the domestic firms is QSD = 50 + 0.5P, while that of the foreign firms is QSF = 200. Instructions: Enter your responses for equilibrium price rounded to the nearest penny (two decimal places). Enter your responses for equilibrium quantity rounded to one decimal place.

a. Determine the equilibrium price and quantity under free trade. Equilibrium price: $ Equilibrium quantity: units

b. Determine the equilibrium price and quantity when foreign firms are constrained by a 100-unit quota. Equilibrium price: $ Equilibrium quantity: units

c. Are domestic consumers better or worse off as a result of the quota?

d. Are domestic producers better or worse off as a result of the quota?

Answer 1

a.

QS = QSF + QSD = 250 + 0.5P.

Setting this equal to domestic demand at equilibrium;

250 + 0.5P = 700 – 1.5P

Or, 2P = 450

Or, P = 225

Solving P = 225 and

Q = 700 - 1.5*225 units = 362.5

b.

Setting total supply under the quota to total demand yields

150 + 0.5P = 700 – 1.5P.

Or, 2P = 550

Or, P = 275

P = $275 and Q = 700 - 1.5*275 units = 287.5

c.
Domestic consumers' condition would worse off. The import quota is a cap on the amount of goods that can be imported into a given country. They will, however, lead to higher consumer prices, a decrease in economic well-being.

d.

Domestic producers' condition would better off. The primary aim of import quotas is to decrease imports and increase domestic production. When the quantity of imports is reduced, the price of imports increases, thereby motivating domestic consumers to buy more domestic output.

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