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ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business

Zentra Ltd exports machinery. Its home government announces a quota on imports of a competing product. Which is the most likely direct effect of the quota on the domestic market for that product?

The most likely effect is a rise in domestic price. A quota limits the quantity of imports, which reduces supply in the domestic market. With demand unchanged, scarcity pushes prices up, which tends to benefit local producers and disadvantage consumers.

  1. AA rise in domestic price because supply from abroad is restrictedCorrect
  2. BA fall in domestic price because competition increases
  3. CNo change in price because quotas only affect exporters
  4. DA rise in the volume of imports because of greater demand

Explanation

A quota caps the quantity of imports, reducing supply in the domestic market. With demand unchanged, prices tend to rise, benefiting domestic producers. Increased competition or higher import volumes would be the opposite of the quota's effect.

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