7. Effect of quotas on local consumers and producers The rollowing graph shows t
ID: 1123367 • Letter: 7
Question
7. Effect of quotas on local consumers and producers The rollowing graph shows the U.S. domestic market for towels. 20 18 16 14 12 10 12 36 48 60 QUANTITY (Millians af towels In the absence of foreign trade, the equilibrium price of a towel is.At this price, both the domestic quantity demanded and the domestic quantity supplied equal million towels. Suppose that trade between the United States and China is open and that the United States initially imposes no tariffs or quotas on towels imported from China. Assume that China has a comparative advantage in producing towels and charges the world price of s6 per towel. (Note: Throughout the problem, assume that the amount demanded by any one country does not affect the world price of towels.) On the previous graph, use the grey line (star symbol) to indicate the world price of towels. At the world price of $6 per towel, the quantity of towels demanded by U.S. buyers is million towels, the quantity of towels supplied by U.S. manufacturers is million towels, and the quantity of towels imported from China is million towels. Suppose now that the United States places a quota on imports of towels from China, which limits imports of Chinese towels to 12 million. (Hint: The original domestic supply curve represents domestic production only.)Explanation / Answer
Absence of foreign trade:
Equilibrium price = $ 10/unit
Domestic quantity demanded = Domestic quantity supplied = 30 mn towels
Open trade:
Quantity of towels demanded = 42 mn
Quantity of towels supplied by US manufacturers = 18 mn
Quantity of towels imported = 42 - 18 = 24 mn
After quota on imports:
Price of towels = $ 8 / unit
Quantity supplied by US producers = 24 mn
Quantity demanded by US consumers = 36 mn
Compared to conditions under free trade, US manufacturers sell less towels and receive a lower price after the imposition of the towel quota, while US consumers buy more towels and pay a lower price after the imposition of the towel quota.
Correct statements:
- The costs to domestic towel consumers may outweigh the benefits of jobs saved in the towel industry.
- China may retaliate, imposing restrictions on exports from the US, thereby generating unemployment in US export industries.
- Trade restrictions simply reshuffle jobs by increasing employment in the protected industry and reducing employment in other industries.
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