Chapter 9, Problem 1FRQ

To determine

The question requires us to draw a graph representing the market before quota and after quota and label the deadweight loss and other variables.

Explanation of Solution

The following graph represents the supply-demand diagram with effective and ineffective quotas:

  

The above graph is the correctly-labeled supply-demand diagram where the x-axis represents the quantity level and the y-axis represents the price level.

Point E is the equilibrium state where demand equals supply. At equilibrium, PE is the equilibrium price, and QE is the equilibrium quantity.

The vertical line left to the equilibrium quantity represents the effective quota at the Qeffective quantity level.

The vertical line right to the equilibrium quantity represents the quota at the Qineffective quantity level, which is ineffective in nature.

The colored triangle ABE shows the deadweight loss due to the quota implementation in the market.