(Solved): 5. Effect of quotas on local consumers and producers The following graph shows the U.S. domestic m ...

5. Effect of quotas on local consumers and producers The following graph shows the U.S. domestic market for toys. 10 Domestic Demand Domestic Supply 9 8 7 6 PRICE (Dollars) 3 2 19 1 0 Price 32 (World) Price (Quota) ?? 0 16 24 40 QUANTITY (Millions of toys) At this price, both the domestic quantity demanded and the In the absence of foreign trade, the equilibrium price of a toy is S domestic quantity supplied equal million toys. Suppose that trade between the United States and China is open and that the United States initially imposes no tariffs or quotas on toys imported from China. Assume that China has a comparative advantage in producing toys and charges the world price of $3 per toy. (Note: Throughout the problem, assume that the amount demanded by any one country does not affect the world price of toys.) On the previous graph, use the grey line (star symbol) to indicate the world price of toys. At the world price of $3 per toy, the quantity of toys demanded by U.S. buyers is manufacturers is million toys, and the quantity of toys imported from China is million toys, the quantity of toys supplied by U.S. million toys. Suppose now that the United States places a quota on imports of toys from China, which limits imports of Chinese toys to 8 million. (Hint: The original domestic supply curve represents domestic production only.) On the previous graph, use the grey line (star symbol) to indicate the world price of toys. At the world price of $3 per toy, the quantity of toys demanded by U.S. buyers is manufacturers is million toys, and the quantity of toys imported from China is million toys, the quantity of toys supplied by U.S. million toys. Suppose now that the United States places a quota on imports of toys from China, which limits imports of Chinese toys to 8 million. (Hint: The original domestic supply curve represents domestic production only.) On the previous graph, use the purple line (diamond symbol) to indicate the new U.S. price under the quota. Under the quota, the price of toys is S the quantity supplied by U.S. producers is million toys, and the quantity demanded by U.S. consumers is million toys. Compared to conditions under free trade, U.S. manufacturers sell quota, while U.S. consumers buy toys and receive price after the imposition of the toy price after the imposition of the toy quota. toys and pay Supporters of the toy quota over free trade argue that the trade restriction will save jobs in the United States. What are the potential pitfalls of such an argument? Check all that apply. The costs to domestic toy consumers may outweigh the benefits of jobs saved in the toy industry. Consumers will likely divert large amounts of scarce resources toward lobbying for the removal of the quota. China may retaliate, imposing restrictions on exports from the United States, thereby generating unemployment in U.S. export industries. O Trade restrictions simply reshuffle jobs by increasing employment in the protected industry and reducing employment in other industries.