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Chapter 4: Q2. (page 189)

Assume that the quota limit is 8 million rides. Suppose demand decreases due to a decline in tourism. What is the smallest parallel leftward shift in demand that would result in the quota no longer having an effect on the market? Illustrate your answer using Figure 4-7.

Short Answer

Expert verified

The smallest decrease in demand will be 4 million rides.

The diagram below shows the demand curve shift from D1to D2.

Step by step solution

01

Explanation 

The quota limit is 8 million rides. The effect of quota will be eliminated when the demand and supply should be equal after the demand shift to the left. The diagram below shows that the quota has no effect.

The demand curve shift from D1to D2, the change in demand is by 4 million rides, i.e., demand fall by 4 rides. When the price is $5 per ride, the demand is 10 million rides, and now after a shift at $5 per ride, the demand is 6 million rides; thus, the smallest leftward shift of the demand curve will be by 4 million rides.

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