Question

To harvest lobster commercially in Maine, you must have a licence, which is issued yearly. Maine is concerned about the state's dwindling lobster supplies off its coast. The state fisheries department has decided to set a yearly quota of 80,000 pounds for lobsters caught in all Maine waters. It has also decided to issue licences only to fishermen who had licences the previous year. The demand and supply curves for Maine lobsters are depicted in the accompanying diagram. a. What are the equilibrium price and quantity in the absence of government restrictions? b. What is the demand price at which consumers would like to buy 80,000 pounds of lobsters? c. What is the supply price for 80,000 pounds of lobsters that suppliers are willing to supply? d. If 80,000 pounds of lobster are sold, what is the quota rent per pound? On the diagram, depict the quota rent and the deadweight loss. e. Describe a transaction that benefits both the buyer and the seller but is barred by the quota restriction.

Solutions

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In this solution we are required to determine the following:

a. The equilibrium price and quantity.

b. The demand price for 80,000 pounds of lobsters.

c. The supply price for 80,000 pounds of lobsters.

d. The quota rent per pound for 80,000 pounds of lobsters sold.

e. A transaction that benefits both buyer and seller but is prevented by the quota restriction.

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