In Exercise 4 in Chapter 2 (page 84), we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of $9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table.
Answer the following questions about the U.S. market: a. Confirm that the demand curve is given by QD = 40 - 2P, and that the supply curve is given by QS = 2>3P.
b. Confirm that if there were no restrictions on trade, the United States would import 16 million pounds.
c. If the United States imposes a tariff of $3 per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?
d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of the fiber? What is the gain for U.S. producers?
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