Question

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts, and domestic consumption is 42 million T-shirts. The country's government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt, and domestic production rises to 15 million T-shirts per year. The quota on T-shirts causes domestic producers to:

a) Gain $5 million.

b) Lose $5 million.

c) Gain $25 million.

d) Gain $30 million.

Answer 1

Domestic producers gain additional revenue after the imposition of an import quota due to increased prices and quantities sold. However, the provided options do not align with the calculated gain of $80 million, indicating a potential error in the options.

Step-by-step explanation:

When a government imposes an import quota on T-shirts that limits imports to 20 million per year, with the domestic price rising to $12 per T-shirt and domestic production rising to 15 million T-shirts, the effect on domestic producers can be analyzed. The increase in revenue for domestic producers can be calculated by examining the increase in price and the increase in quantity sold. With free trade, they were producing 10 million T-shirts at $10 each, amounting to $100 million. After the quota, they produce 15 million T-shirts at $12 each, which amounts to $180 million. Therefore, the quota allows domestic producers to gain $80 million in revenue. However, the question presents options that do not match this calculation, likely due to an error or misprint in the options provided.