Import Quota Effects in a Small Country

Steps:

• An import quota limits the quantity of tractors entering the country, reducing total supply.
• As a small country, the quota does not influence the world market price, so the price of imported tractors remains unchanged.
• The restricted imports cause the domestic market price to rise due to scarcity.
• Higher domestic prices incentivize local producers to increase tractor output.

Why D is correct:

• In a small open economy, quotas leave the import (world) price unaffected while elevating domestic prices, boosting domestic production per the law of supply.

Why the others are wrong:

• A: Neither price nor output falls; domestic output rises.
• B: Domestic output increases due to higher prices.
• C: Import price stays the same, not increases; output rises.

Final answer: D