Question: Suppose that a producer in China is constrained by the MFA to sell a certain number of shirts, regardless of the type of shirt. For a T-shirt selling for $2.00 under free trade, the MFA quota leads to an increase in price to $2.50. For a dress shirt selling for $10.00, the MFA will also lead to an increase in price.
a. Suppose that the MFA leads to an increase in the price of dress shirts from $10 to $11. Will the producer be willing to export both T-shirts and dress shirts? (Remember that only a fixed number of shirts can be exported, but of any type.) Explain why or why not.
b. For the producer to be willing to sell both T-shirts and dress shirts, what must be the price of dress shirts under the MFA?
c. Based on your answer to part (b), calculate the price of dress shirts relative to T-shirts before and after the MFA. What has happened to the relative price due to the MFA?
d. Based on your answer to part (c), what will happen to the relative demand in the United States for dress shirts versus T-shirts from this producer due to the MFA?
e. Thinking now of the total export bundle of this producer, does the MFA lead to quality upgrading or downgrading? How about the removal of the MFA?