Chapter 9, Problem 7MCQ

To determine

The question requires us to determine the factor which would lower the impact of a quota on the quantity sold 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 deadweight loss.

A fall in demand will remove the effect of quota in a market. With the help of the following graph, this statement can be explained:

  

Initially, the market was producing at point E1 where

Equilibrium quantity = Q1

Equilibrium price = P1

Quantity demanded = quantity supplied = Q1

When government sets a quota at Q2, it limits the quantity sold in the market. At quota,

Demand price = P3

Supply price = P2

Quota rent = P3 − P2

After the quota, demand for the product falls and causes the demand curve to shift from D1 to D2 and leading to a new equilibrium in the market. At point E2, the new equilibrium price where the quantity demanded equals the quantity supplied is P2, and the new equilibrium quantity falls and reaches the quota level set by the government at the Q2 level.

So, even in the presence of a quota, the market is clear.

Therefore, a fall in demand will reduce the impact of quota on the quantity sold in a market.

Option “a” is correct.

Other options are incorrect because both an increase in supply and an increase in demand will expand the impact of quota on quantity sold, and price ceiling is a different concept from the quota.