consider the following graph. The world market price under free trade is $6. sup
ID: 1203151 • Letter: C
Question
consider the following graph. The world market price under free trade is $6.
suppose Austria imposes a quota of 12 units, and Austria is a small country.
TRUE or FALSE, and explain why.
(1). Compared with free trade, domestic consumption increases by 3 units.
(2). compared with free trade, domestic production increases by 3 units.
(3). compared with free trade, consumer surplus decreases by a+b+c+d+e.
(4). compared with free trade, producer surplus decreases by a.
Price Austria L -t 3 Ouantitv 12 18 24 27Explanation / Answer
1. Compared with free trade , the dometic consumption increases by 3 units - FALSE. The domestic consumption will decrease by 3 units. At Price $6, the demand is 27 units, when quota of 12 units is imposed, the new price point is $7 and the demand is 24 units. Hence the consumption decreases by 3 units.
2. Compared with free trade, domestic production increases by 3 units - TRUE. The domestic production at $6 is 9, At the new price point $7, the supply is 12 units. Hence the production increases by 3 units.
3. Consumer surplus decreases by a+b+c+d+e - TRUE.
4. Producer surplus decreases by a - FALSE
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