Question: Suppose Americans can buy any number of birdcages on the world market at a price P0. American manufacturers have an upward sloping supply curve that intersects the American demand curve at a price above P0.
a. At what price must American birdcages sell? Illustrate the gains to Americans from the existence of the birdcage market.
b. Suppose the government imposes a quota, by which only Q0 birdcages per year can be imported from abroad, were Q0 is less than the number currently being imported. Show that there is only one price consistent with Americans being willing to import exactly Q0 birdcages per year, and explain why the price will rise to that level.
c. Who wins and who loses as a result of the quota? Use a graph to illustrate the deadweight loss.
d. Is the quota better or worse for Americans than a tariff that reduces the quantity of imported birdcages to Q0?