Import Quota- Detailed Analysis

Question 1

Import Quota Detailed Analysis (L41)

Answer 1

Graph axes:

Vertical axis = Price (from PW to Pquota)

Horizontal axis = Quantity (Q0 to Q4)

Question 2

Key Areas:

Answer 2

PW → Pquota:
Price increases from the world price (PW) to a higher domestic price due to quota restrictions.

Question 3

Domestic supply increases:

Answer 3

Domestic producers increase supply from Q0 to Q1 (from original to new domestic production).

Question 4

Imports decrease:

Answer 4

Imports are limited by the quota to a fixed amount between Q3 and Q4.

Question 5

Domestic demand decreases:

Answer 5

Domestic consumers reduce quantity demanded from Q4 to Q1 because of higher prices.

Question 6

Area a:

Answer 6

This is the gain in producer revenue for domestic producers because they sell more (Q0 to Q1) at a higher price.

Question 7

Area b:

Answer 7

This is the quota rents, revenue gained by foreign producers who are able to sell limited quantities at the higher price (the difference between quota amount and the domestic price premium).

Question 8

Area c + d:

Answer 8

These areas represent deadweight loss (DWL):

c = lost consumer surplus due to higher prices.

d = inefficiency because more costly domestic production replaces cheaper imports.

Question 9

Summary:

Answer 9

Consumers lose because they pay higher prices and buy less.

Domestic producers gain from higher prices and increased output.

Foreign producers may gain quota rents if quota licenses are sold or allocated.

Overall economic inefficiency from deadweight loss areas c and d.