The following graph shows the U.S. domestic market for towels. PRICE (Dolars) Domestic Demand Domestic Supply 24 72 1.20 QUANTITY (Millions of towels) Price (World) Price (Quota) (7) In the absence of foreign trade, the equilibrium price of a towel is domestic quantity supplied equal million towels. At this price, both the domestic quantity demanded and the Suppose that trade between the United States and China is open and that the United States initially imposes no tariffs or quotas on towels imported from China. Assume that China has a comparative advantage in producing towels and charges the world price of $12 per towel. (Note: Throughout the problem, assume that the amount demanded by any one country does not affect the world price of towels.) On the previous graph, use the grey line (star symbol) to indicate the world price of towels. million towels, the quantity of towels supplied by At the world price of $12 per towel, the quantity of towels demanded by U.S. buyers is U.S. manufacturers is million towels, and the quantity of towels imported from China is million towels. Suppose now that the United States places a quota on imports of towels from China, which limits Imports of Chinese towels to 24 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 towels is S demanded by U.S. consumers is , the quantity supplied by U.S. producers is million towels, and the quantity million towels. Compared to conditions under free trade, U.S. manufacturers sell quota, while U.S. consumers buy towels and receive towels and pay price after the imposition of the towel price after the imposition of the towel quota. Supporters of the towel 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. The costs to domestic towel consumers may outweigh the benefits of jobs saved in the towel industry. China may retaliate, imposing restrictions on exports from the United States, thereby generating unemployment in U.S. export industries. Trade restrictions simply reshuffle jobs by increasing employment in the protected industry and reducing employment in other industries. Consumers will likely divert large amounts of scarce resources toward lobbying for the removal of the quota.