Suppose that the domestic demand and supply for books in a small open economy are given by:
Qd = 80 - 3P
Qs = 20 + 3P
where P denotes price and Q denotes quantity. Show all calculations for full credit.
A) What is the autarky price and quantity of books produced?
B) Assume the world price of books is $6. If this country opens its market to free trade, what are the domestic production (supply), the domestic consumption (demand) and the quantity of imports?
C) Suppose that the country imposes a quota of 12 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 production, the domestic consumption and amount imported with the quota?
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.
E) After the quota in Part C is imposed, 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.)
F) Suppose instead of the quota described in Part E that this country negotiates a voluntary export restraint of 12 units with its chief foreign supplier. Calculate a value for the quota rent, deadweight loss and the change in TOTAL welfare between the free trade outcome and the VER outcome.