Let us assume we have domestic demand and supply functions in a selected market of a large open economy.

- Demand: [tex]Q_D = 60000 - 2P_d[/tex]
- Supply: [tex]Q_S = 4P_d[/tex]

Here, [tex]P_d[/tex] represents the domestic price, measured in Euros.

The rest of the world is represented by an excess supply function: [tex]ES(P_w) = 4P_w[/tex].

Question: What level (size) of an import quota would increase this country's domestic price to 12000 Euros?

To increase the domestic price to 12000, we need to determine the import quota size that would achieve this. First, we need to find the equilibrium price and quantity in the absence of any trade restrictions.

To find the equilibrium price, we set the quantity demanded equal to the quantity supplied: 60000 - 2Pd = 4Pd Rearranging the equation, we get: 6Pd = 60000 Pd = 10000 At the equilibrium price of 10000, the quantity demanded and supplied are both 40000. To increase the domestic price to 12000, we need to create an excess demand of 20000. To achieve this.

we can impose an import quota that reduces the quantity supplied by 20000. To find the import quota size, we set the quantity supplied equal to the quantity demanded plus the excess demand: 4Pd = QD + Excess demand 4Pd = 60000 - 2Pd + 20000 6Pd = 80000 Pd = 13333.33 The difference between the equilibrium price and the new domestic price is 3333.33. Therefore, an import quota that reduces the quantity supplied by 20000 would increase the domestic price to 12000.

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