Suppose the domestic demand and supply for bookends in a small open economy are given by the following equations:
P = 75 - Qd
P = 30 + Qs,
where Qd and Qs are in millions of bookends.
(a) Suppose the world price is $41 per unit. Calculate the deadweight loss when the government inhibits free trade by collecting a tariff of $4 per unit.
(b) If the government decides to impose a quota in the amount of 13 units instead of the $4 tariff, what is the effective price in the market?
(c) Given your answers to a and b, which policy imposes the greater loss? Does your answer depend on whether the quota licenses are given to local firms or to foreign firms? Explain.