1. The nation of Acirema is "small" and unable to affect world prices. It imports peanuts at the price of $10 per bag. The demand curve is
D = 400 - 10P.
The supply curve is
S = 50 + 5P.
Determine the free trade equilibrium. Then calculate and graph the following effects of an import quota that limits imports to 50 bags.
a. The increase in the domestic price.
b. The quota rents.
c. The consumption distortion loss.
d. The production distortion loss.
2. If tariffs, quotas, and subsidies each cause net welfare losses, why are they so com- mon, especially in agriculture, among the industrialized countries such as the United States and the members of the European Union?
3. Suppose that workers involved in manufacturing are paid less than all other workers in the economy. What would be the effect on the real income distribution within the economy if there were a substantial tariff levied on manufactured goods?