Question

Consider two countries, Home and Foreign. Home’s demand for sugar is ??/d =60,000−400?. Home not only produces sugar domestically, but also imports sugar from Foreign. Home’s supply of sugar is ? ?/s=20,000+500 ? and Foreign’s supply of sugar to Home is ? ?/s =20,000+100?.
a. With sugar available from Home and Foreign, what is Home’s market price of sugar?
b. How much is produced by Home’s producers at Home’s market price?
c. Suppose an import quota of 13,000 is imposed by Home. What will be the new market price of sugar at Home?
d. How many units of sugar will Home’s producers supply after the quota is imposed?
e. Do Home’s consumers and producers benefit from this quota? Explain.
f. Suppose Home could convert this quota into a tariff equivalent. For the overall well-being of Home’s economy, would such a tariff be considered better, worse, or the same as the quota? Explain.

Answer 1

a. Q H/d = Q H/s + Q F/s

60,000 – 400p = 20,000+500p + 20,000 + 100p

60,000-40,000 = 1000p

P = 20,000/1000 = 20

b. ? ?/s=20,000+500 (20) = 30,000

c. Q H/d = Q H/s + Q F/s

60,000 – 400p = 20,000+500p + 13000

500p + 400p = 60,000 -20,000 - 13,000

900p = 27,000

P= 30

d. ? ?/s=20,000+500 (30) = 45,000

e. Quota imposes resulting into increase into price, so home producers will be benefited by this however this rise in price is loss to consumers.

f. Import tariff will be better than quota. Due to tariff, the price of imported goods increases. Hence this gives the domestic producers some extra legroom to maintain their prices at current market price. The threat of competition reduces and so the producers are not forced to reduce their prices in the name of competition. Also, the domestic demand for goods increases followed by an increase in production and labor and so on.

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