Question

Import Quotas An import quota qˉ on foreign supply S (p) is effective at sufficiently high prices. If pˉ is the price at which S ( pˉ ) = qˉ, then for prices p< pˉ S (p)< qˉand the quota will not affect foreign supply. For prices p≥ pˉ, foreign firms want to supply S (p)≥ qˉbut the quota is effective and foreign supply will be limited to qˉ .That is, aggregate supply is S (p)+S (p) for p< pˉ and qˉ+S (p) for p≥ pˉ . Freebats are produced both inside and outside Freedonia, but consumed only in Freedonia. The market is competitive, with demand

D(p) = { 2250−10p for p≤150
0 for p>150
where p is the price per unit. The supply from producers in Freedonia is SD (p)=2p and the supply from producers outside Freedonia is SO
​(p)=3p. For simplicity, ignore transportation costs between Freedonia and other countries.
1. What is the aggregate supply of Freebats (without any import restrictions)?​



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Answer 1

The aggregate supply without import restrictions for Freebats is the sum of domestic and foreign supply, calculated as 5p. Tariffs and import quotas raise prices, decreasing consumer surplus and increasing producer revenue.

Step-by-step explanation:

The aggregate supply of Freebats, without any import restrictions, would be the sum of domestic supply from producers in Freedonia (SD (p)) and foreign supply from producers outside of Freedonia (SO (p)).

The domestic supply function is SD (p) = 2p and the foreign supply function is SO (p) = 3p. To find the aggregate supply, we add these two functions together, resulting in S(p) = SD (p) + SO (p) which simplifies to S(p) = 2p + 3p = 5p. Therefore, for every unit price p, the aggregate supply will be 5 times p without any quotas.

When analyzing the effects of a tariff or an import quota, these barriers typically raise the price of imported goods, thereby reducing the quantity consumed and shifting some of the consumer expenditure towards domestic producers. This can result in a higher price for domestic consumers and increase revenues for domestic suppliers, affecting consumer surplus and producer surplus respectively.