Suppose there is a small country called the Home (10111113le with an import-competing industry which has only one producer [a monopolist). The demand function for the imported good is given by where D is demand and P is the price of the good. The marginal cost function for production of this good isM0 = 3 —t— 0.54;}, where MC“ is marginal cost and Q is output. The Home country,r can trade with the rest of theworld in free trade at a price equal to P” = 4.0.
Calculate the price, output, and consumption in the Home country r when the Home governmental poses a speci? import tariff equal to 1′ = 0.5. Calculate these variables when the Home government imposes an import quota equal to the level of imports under the tariif. Compare the prices between the two policies and provide economic intuition for the direction of the difference in the prices.