4. Effect of quotas on local consumers and producers The following graph shows the U.S. domestic market for jackets. PRICE (Dollars) 20 18 Domestic Supply Domestic Demand 16 14 12 10 8 6 4 2 Domestic Supply Price (World) Domestic Demand Price Quota) 0 ° + 8 16 24 32 40 48 56 64 72 80 QUANTITY (Millions of jackets) In the absence of trade with China, the equilibrium price of a jacket is S the domestic quantity supplied equal million jackets. ? At this price, both the domestic quantity demanded and Suppose that trade between the United States and China is open and that the United States initially imposes no tariffs or quotas on jackets imported from China. Assume that China has a comparative advantage in producing jackets and charges the world price of $6 per jacket. (Note: Throughout the problem, assume that the amount demanded by any one country does not affect the world price of jackets.) On the graph, use the grey line (star symbol) to indicate the world price of jackets. At the world price of $6 per jacket, the quantity of jackets demanded by U.S. buyers is million jackets, the quantity of jackets supplied by U.S. manufacturers is million jackets, and the quantity of jackets imported from China is million jackets. Suppose now that the United States places a quota on imports of jackets from China, which limits imports of Chinese jackets to 16 million. (Hint: The original domestic supply curve represents domestic production only.) On the previous graph, use the purple line (diamond symbol) to indicate the new U.S. price under the quota. Under the quota, the price of jackets is S demanded by U.S. consumers is , the quantity supplied by U.S. producers is million jackets, and the quantity million jackets. Compared to conditions under free trade, U.S. manufacturers sell jacket quota, while U.S. consumers buy jackets and receive jackets and pay price after the imposition of the price after the imposition of the jacket quota. Supporters of the jacket quota over free trade argue that the trade restriction will save jobs in the United States. What are the potential pitfalls of such an argument? Check all that apply. Consumers will likely divert large amounts of scarce resources toward lobbying for the removal of the quota. Trade restrictions simply reshuffle jobs by increasing employment in the protected industry and reducing employment in other industries. China may retaliate, imposing restrictions on their imports from the United States, thereby generating unemployment in U.S. export industries. The costs to domestic jacket consumers may outweigh the benefits of jobs saved in the jacket industry.