In general, what effect does a quota have on the prices of comparable goods in the domestic market?

• A. Quotas tend to increase the prices of comparable goods by restricting supply.
• B. Quotas have no effect on the prices of comparable goods in the domestic market.
• C. Quotas always lead to prices falling below the equilibrium price.
• D. Quotas tend to decrease the prices of comparable goods by increasing competition.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand what a quota is — a quota is a government-imposed limit on the quantity of a good that can be imported into a country, effectively restricting supply from foreign producers.
2. Step 2: Analyze the impact of restricting supply — when the supply of a good is limited by a quota, the total available quantity in the domestic market decreases compared to a free trade scenario.
3. Step 3: Apply the law of supply and demand — with supply restricted and demand remaining constant, the scarcity of the good tends to push the domestic price upward.
4. Step 4: Consider the effect on comparable goods — since the quota raises the price of the restricted good, consumers may switch to similar domestic or imported goods not subject to quotas, which can also experience price increases due to higher demand.
5. Step 5: Conclude that quotas tend to increase prices of comparable goods by restricting supply, rather than decreasing prices or having no effect.