Suppose there is only 1 firm that sells coffee in the Home market. The marginal cost of the local monopolist is MC = $20. Given the price of a pound of coffee P, the demand for coffee is P = 100 - Q.
(a) What is the local price of a pound of coffee in the no trade equilibrium? How many pounds of coffee are produced by the local monopolist? (Hint. If the demand is P = A - B*Q, where A and B are some constants, then the marginal revenue of the monopolist is MR = A - 2*B*Q.)
(b) Now assume that the Home economy opens to trade with the rest of the world, but trade is not free: the Home government imposes an import quota of 20 pounds of coffee. The price of the pound of coffee in the world market is $25. What is the price of the pound of coffee in the Home market? What is the output of the local monopolist? What is the total consumption of coffee at Home? (Hint. See Figure 9-4 for the idea.)