Question

Suppose the world price of bicycles is $300. Mexico imports bicycles and has had a 0.6 million until import quota on bikes for several decades, raising the Mexican price to $330. (also the market is in perfect competition, meaning that all bikes are identical and there are many producers in Mexico and the World and Mexico is too small to influence world prices).

A. Suddenly this year the world price of bicycles falls. Assuming no change in the quota law, how, if all does the world price increase change the following:

i. the quantity of bikes imported to Mexico.

ii. the price of bikes in Mexico. EXPLAIN HOW

iii, Mexico's bike consumption

Answer 1

Summary

*The World Price of a bicycle is $300

* Mexico imports valued 0.6 million until the trade restrictions

*The market is in perfect competition, means there are many other producers in the market producing the same type of goods and all the players in the market influence the price.

* Assuming the quota law(trade restriction) remains the same and now the world price for bicycle increases.

ANSWER

A. i) As the world price of the bicycle will increase it will lead to a decrease in the quantity demanded. Say for example. now if the world price of the Bicycle increased from $300 to $600. So, the world price has increased more by $300 which will have an inverse impact on the demand for the product also because Mexico influence world price, it will not be able to profit more.

A.ii) The price of bikes in Mexico will decrease, because the country will import less number of bicycles from the international market which will give high scope for the domestic players in the mexican market. Also the mexican market has very less influnce over the world market therefore, the inhouse production of bicycles will increase(more producers producing bikes in mexico and exporting more in other countries).

A.iii) Mexico' s bike consumption ability will increase because local bikes price will decrease which will increase the domestic consumption and also more exports.