Answer to Question #58860 in Macroeconomics for Frances Fitzgerald
In the international market for strawberries, Ireland is small and can be assumed to be unable to affect world prices. It imports strawberries at the price of 15 euros per box. The domestic supply and domestic demand curves for boxes of strawberries are given by QS = 60 + 20P and QD = 1225 – 15P respectively.
i. Assume Ireland is completely open to trade. What is the equilibrium price and quantity consumed? How much is produced domestically and how much is imported? Illustrate you answer on a diagram.
ii. Now consider the effect of an import quota of 400 boxes. What happens to the price of strawberries and the quantity consumed? How much is produced domestically and how much is imported? Illustrate you answer on a diagram.
iii. Who wins and who loses from the imposition of the quota? Discuss the effects on consumers, domestic producers and importers in terms of welfare changes. Illustrate you answer on a diagram.
Ireland imports strawberries at the price of 15 euros per box. QS = 60 + 20P, QD = 1225 – 15P. i. If Ireland is completely open to trade, then the equilibrium price will be $15 and quantity consumed will be Qd = 1225 - 15*15 = 1,000 units. The amount of strawberries produced domestically is Qs = 60 + 20*15 = 360 and the amount imported is Qi = 1,000 - 360 = 640. ii. If the import quota of 400 boxes is imposed, then 400 boxes will be imported and produced domestically will be Qs = Qd - 400, 60 + 20P = 1225 - 15P - 400, 35P = 765 P = $21.86 is the price of strawberries. The amount produced will be: Qs = 60 + 20*21.86 = 497 boxes. iii. Producers will win and consumers will lose from the imposition of the quota.