Question: Suppose that the domestic demand and supply for hats in a small open economy are given by. where Q denotes quantity and P denotes price.

Suppose that the domestic demand and supply for hats in a small open economy are given by.

Q 80 P(demand) Q=40 + 2P (supply)

where Q denotes quantity and P denotes price.

a. If the world price is 10, what is the free trade level of imports?

b. Suppose that the country imposes a quota of 4 units. How much will the domestic price rise?

c. What will be the welfare effects on this country of a quota of 11 units?

d. Suppose instead that this country negotiates a VER of 11 units with its chief foreign supplier.
What are the welfare effects of this policy?

Q 80 P(demand) Q=40 + 2P (supply)

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