Suppose that the domestic demand and supply for t-shirts in a small open economy are given by:
Qd = 120 - 2P
Qs = 40 + 3P
where Q denotes quantity and P denotes price. Show all calculations for full credit.
(a) What is the autarky price and quantity of t-shirts produced? ($1,000)
(b) Assume the world price of t-shirts is $10. If this country opens its market to free trade, what are the domestic consumption (demand), domestic production (supply), and the quantity of imports? ($500)
(c) Suppose that the country imposes a quota of 15 units. Find the new price after the quota is imposed. Compare the new price (with the quota) to the free trade price. By how much does the price rise after trade is restricted by the quota? What are the domestic consumption, domestic production, and amount imported with the quota? ($1,500)
(d) Draw a Supply & Demand curve which shows all the information from Parts A-C: autarky, free trade and impact of the quota on production, consumption, imports & price. ($1,000)
(e) After the quota in Part C is imposed, compared to the free trade outcome, how has domestic welfare been affected? (Assume all quota rents go to domestic producers and calculate a value for the consumer deadweight loss, producer deadweight loss and total deadweight loss between the free trade outcome and the quota outcome.) ($1,000)
(f) Suppose instead of the quota described in Part E that this country negotiates a voluntary export restraint of 15 units with its chief foreign supplier. What are the welfare effects of this policy? (Calculate the value for the change in quota rent and the change in TOTAL welfare between the free trade outcome and the VER outcome). ($1,000)