The question requires us to determine the quota rent when the government sets a quota of 1000 in the market.
Explanation of Solution
A quote puts an upper limit on the quantity sold or purchased in a market. Quota brings inefficiency in the market by generating a
From the given diagram:
Without government interference, the market was at equilibrium at point E where the
Equilibrium price = $6
The
When government sets a quota of 1000, the consumers will have to pay a higher demand price as shown in the graph which is equal to $8 while the producers have to accept a lesser supply price which is equal to $4.
Quota rent is the difference between these prices.
Quota rent = demand price − supply price
Thus, when the government sets a quota at 1000 units, $4 will be the quota rent.
Thus, Option “b” is correct.
Chapter 9 Solutions
Krugman's Economics For The Ap® Course
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