Question 26

A domestic producer has increased sales.

Imposing a quota on an imported good restricts the quantity that can be imported, which benefits domestic producers by allowing them to sell more of their products in the market without facing as much competition from foreign goods.

A) A foreign producer has increased sales.

This option is incorrect because a quota limits the amount of a good that can be imported from foreign producers. As a result, foreign producers are likely to see a decrease in sales due to the restrictions imposed by the quota.

B) A domestic producer has increased sales.

This option is correct as it accurately reflects the impact of a quota. By limiting imports, domestic producers can increase their sales because they face less competition from foreign goods, allowing them to capture a larger share of the market.

C) The domestic government gains tax revenues.

While quotas can influence government revenues, this option is not accurate in this context. Quotas typically do not generate tax revenues in the same way tariffs do, as they do not impose a tax on imports, but rather limit their quantity.

D) Foreign prices fall.

This option is incorrect because a quota on imports can lead to higher prices for foreign goods, not lower. With limited supply in the market, the prices of remaining foreign goods may actually rise as demand exceeds the available supply.

Conclusion

The correct answer, B, is supported by the economic principle that restricting imports typically benefits domestic producers by allowing them to sell more of their products. All other options fail to accurately describe the consequences of a quota, highlighting the essential role that quotas play in protecting domestic industries from foreign competition.