Question

1. Assume that a country (Tomas) negotiates an agreement with its trading partners to restrict imports of cherry jam into Tomas through a Voluntary Export Restraint (VER or VRA) (the same would hold for a quota). Indicate the consequence for each category/group a-d listed below within the country (Tomas).

(Indicate the effect with an I for increase, D for decrease, and U for un/ indeterminate from information provided)

1. ______ Import prices of Cherry Jam for Tomas                           
2. _______Domestic produced price of Cherry Jam in Tomas
3. _______Industry sales of domestically produced Cherry Jam in Tomas
4. _______Overseas trading partner country price of Cherry Jam

Answer 1

a. I  Import prices of cherry Jam for Tomas would 'increase'.Before the implementation of this agreement,there must be some supply and demand of cherry jam in the market of Tomas leading to an equilibrium quantity and price.When this VRA is implemented,the import quantity would be restricted leading to scarcity in the supply of required jam in the market.The demand would exceed the supply of jam resulting in rise in import prices.

b. I  Domestic produced price of cherry jam in Tomas would 'increase' due to the fall in supply due to reduction in import.The quantity demanded remains at the initial equilibrium level but the quantity supplied shrinks,hence the locally produced supply would be demanded more than its supply resulting in rise in prices.

c. I  Industry sells of domestically produced cherry jams in Tomas would 'Increase',as a result of fall in the supply due to reduction in the import quantity but the quantity demanded remains at initial level which is more the supply quantity.

d. D Overseas trading partner country price of cherry jam would 'decrease'.This is so because the quantity supplied of cherry jam in the overseas partners country remains the same before and after the implementation of VRA in the short run.So in the market of concerned country the export of jams would come down resulting in the fall in the demand in their products but as initially the quantity supplied remains at initial level the supply exceeds the demand resulting in fall in the prices of jam products.