Refer to Figure 7-5. Fenwick currently both produces and imports pistachios. The government of Fenwick decides to restrict international trade in pistachios by imposing a quota that allows imports of only 5 million pounds each year
Figure 7-5 shows the estimated demand and supply curves for pistachios in Fenwick and the results of imposing the quota. Answer questions a-j using the figure.
a. If there is no quota what is the domestic price of pistachios and what is the quantity of pistachios demanded by consumers?
b. If there is no quota how many pounds of pistachios would domestic producers supply and what quantity would be imported?
c. If there is no quota what is the dollar value of consumer surplus?
d. If there is no quota what is the dollar value of producer surplus received by producers in Fenwick?
e. If there is no quota what is the revenue received by foreign producers who supply pistachios to Fenwick?
f. With a quota in place what is the price that consumers of Fenwick must now pay and what is the quantity demanded?
g. With a quota in place what is the dollar value of consumer surplus? Are consumers better off?
h. With a quota in place what is the dollar value of producer surplus received by producers in Fenwick? Are domestic producers better off?
i. Calculate the revenue to foreign producers who are granted permission to sell in Fenwick after the imposition of the quota.
j. Calculate the deadweight loss as a result of the quota.
a. Price without a quota = $4 per pound; quantity demanded = 19 million pounds
b. Quantity supplied by domestic producers when there is no quota = 9 million pounds; quantity imported = 10 million pounds
c. Consumer surplus without a quota = 1/2 × $6 × 19 million = $57 million
d. Domestic producer surplus without a quota = 1/2 × 9 million × $3 = $13.5 million
e. Revenue received by foreign producers when there is no quota =10 million × $4 = $40 million
f. Price with a quota = $5 per pound; quantity demanded = 17 million pounds
g. Consumer surplus with a quota = 1/2 × $5 × 17 million = $42.5 million. No, consumers are worse off.
h. Domestic producer surplus with a quota = 1/2 × $4 × 12 million = $24 million. Yes, domestic producers are better off.
i. With a quota revenue to foreign producers = $5 × 5 million = $25 million
j. Deadweight loss = 1/2 × $1 × 3 million + 1/2 × $1 × 2 million = $2.5 million
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