Compute and graphing of equilibrium price and quantity in autarky marketplace and open economy. Impact of quota on domestic welfare.
Suppose that the domestic demand and supply for hats in a small open economy are given by:
Q = 80 - 2P(demand)
Q = 20 + 2P(supply)
Where Q denotes quantity and P denotes price.
a.Graph the Supply and Demand curves. Be sure to label everything including the axes, the autarky price and quantity and the intercepts for both the price and quantity axes. Show your calculations for full credit. (There is an ex graph in the HW 2 folder on ANGEL that you might want to use as a starting point).
b. The world price is $9. If this country opens its market to free trade, what is the quantity demanded, quantity supplied and the quantity of imports? Show your calculations for full credit. Add these values to your graph from part a, show the new graph below:
c.Suppose that the country imposes a quota of 18 units. Find the new price after the quota is imposed. What are the quantity demanded and the quantity supplied values at the new price after the quota is imposed? Show your calculations for full credit. Add these values to your graph from part b, show the new graph below:
d. After the quota of 18 units is imposed, how has domestic welfare been affected? (Assume all quota rents go to domestic producers and find out a value for the change in welfare between the free trade outcome and the quota outcome). Show your calculations for full credit. You do not need to show a graph for this part.