Question

Quotas - Welfare Analysis Exercise 1 The graphs below show the market for apricots in the United States, a nation that is open to international trade but is assumed to be a price taker unable to affect the world price of apricots. a. In the graph below, identify the areas that represent the consumer surplus (CS) and producer surplus (PS) with international trade. Instructions: Use the tools provided 'CS' and 'PS' to illustrate these areas on the graph. Market for Apricots 1800 1700 1600 1500 1400 1300 1200 Price (dollars per ton 0 102030 40 50 60 70 80 90100 10 20 30 40 50 60 Quantity (thousands of tons)

Answer 1

a. Note that the consumer surplus is the excess of benefit which a consumer receives over the price he pays. It is the difference between the demand curve and the price line. Similarly, the producer surplus is the excess of the price over the minimum price at which he wants to sell and thus it is the difference between the price line and the supply curve.

PS 30 0

b. As we can see in the graph, the price is equal to $500 per ton. At this price, the total sales from the domestic country as given by the supply curve is 30 thousand of tonnes. the total demand, however, is 110 thousand of tons. Thus the imports are 110-30=80 thousand of tonnes.

c. After the imposition of the quota, the new price now will be at the intersection of demand and new supply curve which is at the price of $700 per ton. The consumer and producer surplus is depicted in the following graph.

The quota rent is the rent which is received by the owner of the imported good. It is plotted as the crossed checked area in the following graph.

quota Yeo PS 30 to 10 50 90

d. At the new price of $700, the domestic supply is 50 thousand of tons and thus the imports, in this case, will be 90-50=40 thousand tons.