CA Foundation · Business Economics · International Trade
Which of the following is the main effect of an import quota on the price of the imported good in the importing country's domestic market?
An import quota usually raises the domestic price above the free-trade world price. Because the quota limits the physical quantity that can be imported, total supply in the home market shrinks while demand stays the same, which pushes the price up for consumers.
- AThe domestic price generally rises above the free-trade world price because supply is restrictedCorrect
- BThe domestic price falls below the world price because imports are limited
- CThe domestic price stays the same because quotas do not affect prices
- DThe domestic price becomes zero for the quota quantity
Explanation
A quota caps the quantity of imports, so domestic supply is lower than under free trade. With demand unchanged, the domestic price rises above the world price. The option saying the price falls confuses a quota with an increase in supply.
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