Demand is given by QD = 6000 – 50P. Domestic supply is QS = 25P. Forei

Demand is given by QD = 6000 – 50P. Domestic supply is QS = 25P. Foreign producers can supply any quantity at a price of $40.

a. If foreign producers can sell in the domestic market, what is the equilibrium price? What is the equilibrium quantity? How much is sold by domestic and foreign producers, respectively?
b. Under domestic government pressure, foreign producers voluntarily agree to restrict their goods. What will happen to the price and quantity? What will happen to the amount that domestic producers supply? What will happen to revenues of domestic and foreign producers?

ANSWER

a. P = $40. Q = 4,000. Of that, domestic producers supply 1,000 units, and foreign producers supply 3,000 units.
b. The quantity restriction will cause equilibrium price to rise and quantity to decrease. Domestic producers will sell more, and foreign producers will sell less. Revenues of domestic producers will rise. The effect on the revenues of foreign producers is unclear; if demand is inelastic, they may rise.