1. Returns to the Indian cotton trade example. Recall that India's...

1. Returns to the Indian cotton trade example. Recall that India's domestic demand and supply of cotton are Q_D = 2250 - 300P and Q_S = - 125 + 250P. The world price is $1 per pound. Recall that quantities are in 1,000s of metric tons (so, for example, a Q of "5" is really 5,000 metric tons of cotton).

 

(a) SCENARIO 1.

Suppose that instead of a $1 tariff, India imposed a quota of 600. Think of this as increasing Q_S, that is, at any and every price, there will be an additional 600 units of cotton on the market coming from abroad. What is the total amount of imports under this scenario? What is the prevailing price in India? What is the "tariff equivalent" of the quota? Calculate numerically, and illustrate with a graph.

 

(b) SCENARIO 2.

Now suppose that Indian cotton demand rises to Q_D = 2850 - 300P, and the 600 unit quota is in place. What happens to domestic price? To imports? What is the "tariff equivalent" of the quota now? Illustrate with a graph and explain.