Table the demand and supply schedules for computers in Ecuador, a ‘‘small’’
Computer Supply and Demand: Ecuador
|
Price of Computer
|
Quantity Demanded
|
Quantity Supplied
|
$ 0
|
100
|
—
|
200
|
90
|
0
|
400
|
80
|
10
|
600
|
70
|
20
|
800
|
60
|
30
|
1,000
|
50
|
40
|
1,200
|
40
|
50
|
1,400
|
30
|
60
|
1,600
|
20
|
70
|
1,800
|
10
|
80
|
2,000
|
0
|
90
|
nation that is unable to affect world prices. On graph paper, sketch Ecuador’s demand and supply schedules of computers.
a. Assume that Hong Kong and Taiwan can supply computers to Ecuador at a per-unit price of $300 and $500, respectively. With free trade, how many computers does Ecuador import? From which nation does it import?
b. Suppose Ecuador and Hong Kong negotiate a voluntary export agreement in which Hong Kong imposes on its exporters a quota that limits shipments to Ecuador to 40 computers. Assume Taiwan does not take advantage of the situation by exporting computers to Ecuador. Determine the quota-induced price increase and the reduction in consumer surplus for Ecuador. Determine the quota’s redistributive effect, protective effect, consumption effect, and revenue effect. Because the export quota is administered by Hong Kong, its exporters will capture the quota’s revenue effect. Determine the overall welfare loss to Ecuador as a result of the quota.
c. Again assume that Hong Kong imposes an export quota on its producers that restricts shipments to Ecuador to 40 computers, but now suppose that Taiwan, a non-restrained exporter, ships an additional 20 computers to Ecuador. Ecuador thus imports 60 computers. Determine the overall welfare loss to Ecuador as a result of the quota.
d. In general, when increases in nonrestrained supply offset part of the cutback in shipments that occur under an export quota, will the overall welfare loss for the importing country be greater or smaller than that which occurs in the absence of nonrestrained supply? Determine this amount in the example of Ecuador.