May anybody help me with this question, thank you! 1. Figure 6.2 shows the domes
ID: 1217820 • Letter: M
Question
May anybody help me with this question, thank you!
1. Figure 6.2 shows the domestic supply and demand for good X in a small country facing a world price of $7.00. An import quota of 4,000 units is imposed.
a) To enforce the quota, import licenses are auctioned to importers. Each license allows the license owner to import 1 unit of good X. Calculate what the cost of each license will be.
b) Calculate the total revenues that will be earned through the auction of import licenses.
c) Calculate the welfare cost of the quota to the importing country.
d) Instead of auctioning the quotas to domestic importing firms, the governments of foreign countries that export the good are asked to voluntarily restrict their exports to 4,000 units. Calculate the welfare cost of this VER to the importing country.
e) In part d, you should have found that the welfare cost of a VER exceeds that of a simple quota. Why, then, would a country consider a VER for protection rather than a quota?
f) Based on Fig. 6.1 what is the dollar tariff per unit that will produce the same production and consumption effects as an import quota of 4,000 units?
Explanation / Answer
a, The cost of each license = Difference in Price before and after Quota = $8.5 - $7 = $1.5
b. Total revenue earned = $1.5*4000 = $6000
c, Welfare cost = 1/2(8.5-7)(4000 - 2000) + 1/2(8.5-7)(10000 - 8000)
= 1500 + 1500
= $3,000
d. Cost of this VER = Total revenue earned + Welfare Cost = $6000 + $3000
= $9,000
e. VERs are often created because the exporting countries would prefer to impose their own restrictions than risk sustaining worse terms from tariffs and/or quotas.
f. the dollar tariff per unit = Change in Price = $8.5 - $7 = $1.5
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