Question

Answer questions 1 through 5 based on the following information: Suppose the world price for shoes is $32 per pair. Domestic demand and domestic supply are determined by the following equations:

Domestic Demand: p = 120 ≠ 2q

Domestic Supply: p = 20 + 3q where p and q represent price and quantity, respectively.

5. Once again, suppose that the import quota of 30 pairs of shoes is implemented. What is the quota-induced price facing domestic consumers and producers?

A) $55 B) $44 C) $38 D) none of the above

6. Once again, suppose that the import quota of 30 pairs of shoes is implemented. What is the quota rent?

A) $280 B) $320 C) $360 D) none of the above.

7. Once again, suppose that the import quota of 30 pairs of shoes is implemented. For domestic government to be able to fully collect the quota rent, the import license should be auctioned at a price of _________ per pair of shoes.

A) $10 B) $12 C) $15 D) none of the above

8. If domestic government wants to levy an ad valorem tariff on imported shoes so as to obtain the same market outcomes as under the import quota of 30 pairs of shoes noted above. What is the quota-equivalent tariff rate?

A) $37.5% B) $40% C) $52.5% D) none of the above

Answer 1

5) p = 120 - 2q

q = 60 - 0.5p. This is demand

p = 20 + 3q

q = (p/3) - (20/3)

Import quota of 30 pairs is implemented. This means the difference between supply and demand has to be 30

60 - 0.5p - (p/3) + (20/3) = 30

180 - 1.5p - p +20 = 90

200 -2.5p = 90

p = 44

Therefore, quota-induced price facing domestic consumers and producers = option b) $44

6) Quota rent = quantity imported * (change in import price) = 30 * (44-32) = $360

Therefore, correct answer is option c) $360

7) For domestic government to be able to fully collect the quota rent, the import license should be auctioned at a price of $360/30 = $12 per pair of shoes. Therefore, correct answer is B) $12

8) Before quota, the price was $32. After quota, the price becomes $44. Change in price = (44-32)*100 / 32 = 37.5%

So,  If domestic government wants to levy an ad valorem tariff on imported shoes so as to obtain the same market outcomes as under the import quota of 30 pairs of shoes noted above, then the quota-equivalent tariff rate is 37.5%

Correct answer is A) 37.5%

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