In this problem, we analyze the effects of an import quota applied by a country facing a Foreign monopolist. In Figure 9-7, suppose that the Home country applies an import quota of X2, meaning that the Foreign firm cannot sell any more than that amount.
a. To achieve exports sales of X2, what is the highest price that the Foreign firm can charge?
b. At the price you have identified in part (a), what is the Home consumer surplus?
c. Compare the consumer surplus you identified in part (b) with the consumer surplus under free trade. Therefore, outline in Figure 9-7 the Home losses due to the quota. Hint: Remember that there is no Home firm, so you do not need to take into account Home producer surplus or tariff revenue. Assume that quota rents go to Foreign firms.
d. Based on your answer to (c), which has the greater loss to the Home country-a tariff or a quota, leading to the same level of sales X2 by the Foreign firm?