A. Chapter 8: Import Quotas 3. Aoslia is a small country that takes the world price...

A. Chapter 8: Import Quotas
3. Aoslia is a small country that takes the world price of corn as
given. Its domestic supply and demand for corn are given by the
following: Hint: You need to use graphs to answer this question.
D = 45 − 3P
S = 3P − 9
a. Assume initially that Aoslia does not open to trade. What is the autarky
equilibrium price and quantity?
b. Aoslia decides to engage in trade at the world price of $6 per bushel of
corn. What is the quantity supplied and the quantity demanded at this
world price?
c. The Aoslia government now imposes a tariff in the amount of $1
(i.e., t = $1). What is the quantity supplied and the quantity demanded at this
new price with the tariff?
d. Suppose the Aoslian government applies an import quota that limits
imports to 12 bushels. Determine the quantity demanded, quantity
supplied, and new domestic price with the quota.
e. Calculate the quota rent.
f. Assuming that the quota licenses are allocated to domestic producers,
what is the net effect of the quota on Aoslia’s welfare?
g. Assuming that the quota rents are earned by foreign exporters, what is
the net effect of the quota on Aoslia’s welfare?

Solutions

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