In a small, open economy, domestic demand for calculators is given by P = 66.1 – Q, domestic supply is given by P = 3.1Q and the world price is $6.4. The economic advisors of the country decide to impose a tariff of $6. What quota will have the same impact as the tariff?

Question

BlackTom AI · Accepted Answer

We start by understanding the setup in a small open economy with the given curves and a tariff or quota.

Step 1: Determine the effect of the tariff on the domestic price and the import quantity.
- World price Pw = 6.4. When a tariff t = 6 is imposed, the domestic price becomes Pd = Pw + t = 6.4 + 6 = 12.4.
- Domestic demand at Pd = 12.4 is Qd = 66.1 − 12.4 = 53.7.
- Domestic supply at Pd = 12.4 is Qs = Pd / 3.1 = 12.4 / 3.1 = 4.0.
- Imports under the tariff = Qd − Qs = 53.7 − 4.0 = 49.7.

Step 2: Identify the imports level that a tariff achieves.
- The tariff reduces imports from the free-trade level to 49.7 units (as computed above).

Step 3: Translate the tariff effect into an equivalent quota.
- An import quota is a cap on the quantity that can be imported. To replicate the tariff’s impact on the market (specifically the same level of imports and the same price outcome), the quota must bind at the same import quantity as under the tariff.
- Therefore, the quota should be set so that imports are 49.7 units, matching the tariff’s imported quantity.

Step 4: Conclude the quota quantity that matches the tariff.
- The quantity that the tariff allows for imports is 49.7 units, so the equivalent quota is set at 49.7.

In summary, the tariff reduces imports to 49.7 units. To have the same effect on the market, a quota of 49.7 units on imports would be required, since it would restrict imports to the same level and lead to the same price and allocation between domestic production and consumption.

In a small, open economy, domestic demand for calculators is given by P = 66.1 – Q, domestic supply is given by P = 3.1Q and the world price is $6.4. The economic advisors of the country decide to impose a tariff of $6. What quota will have the same impact as the tariff?Numerical

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In a small, open economy, domestic demand for calculators is given by P = 66.1 – Q, domestic supply is given by P = 3.1Q and the world price is $6.4. The economic advisors of the country decide to impose a tariff of $6. What quota will have the same impact as the tariff?Numerical

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