Analysis of a tariff

| January 23, 2015

A small country imports T-shirts. With free trade at a world price of $10, domestic production is 10 million T-shirts and domestic consumption is 42 million T-shirts. The country’s government now decides to impose a quota to limit T-shirt imports to 20 million per year. With the import quota in place, the domestic price rises to $12 per T-shirt and domestic production rises to 15 million T-shirts per year.

1. This quota on T-shirts causes domestic consumers to_________(calculate and complete the sentence).

2. If import licenses are allocated based on fixed favoritism, how much will be gained by the holders of the import licenses? (Show all working)

3. If import licenses are allocated based on a resource-using application procedure, how much will be the loss to the economy? Explain

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