Question

1. Assume the government imposes a quota on the importation of foreign cars, with the quota being less than the number of cars that would be bought and sold in the U.S. without the quota. (Assume the market for foreign cars is competitive.) The graph below shows an example of a quota of 10 cars would affect the supply curve S1 10 12 (a) Using the supply and demand curves for foreign cars, show graphically why the quota policy will lead to an efficiency loss and what the amount of the loss would be. Why might the government impose such a quota anyway? (b) Now let's do a numerical example illustrating the effect of a quota. Suppose the demand (c) Find the equilibrium price and quantity (without any quota) and calculate the producer (d) Now suppose the government puts a quota of Q-10. Calculate the new equilibrium price curve is given by P 60-30 and the supply curve is given by P-20 surplus, consumer surplus, and the total social surplus. and the new values of producer surplus, consumer surplus, and total social surplus (e) Calculate the efficiency (deadweight) loss from the quota. (f) The quota of Q-I0 is for the entire industry. Suppose the government wants to impose a quota of Q-10 in an industry where there are only two firms. The marginal costs for the two firms are given by MC 2 and MC 8Q2. If the government wants to allocate the total allowable production efficiently between the two firms, how much should it

Answer 1

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