Solution Code: 1ECF
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Question 3: Answer the following questions
Government Actions in Markets – Price floor
Price
(dollar per tonne) |
Quantity
demanded
(kilo tonnes) |
Quantity
supplied
(kilo tonnes) |
100 | 2,000 | 0 |
150 | 1,400 | 600 |
200 | 1,200 | 800 |
250 | 1,000 | 1,000 |
300 | 800 | 1,200 |
350 | 600 | 1,400 |
400 | 0 | 2,000 |
The table shows the demand and supply schedules for US wheat market. The US Farm Bill 2012 indicates that the domestic price of wheat will be set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 1,000 kilo tonnes (Kt) are supplied.
Global Markets in Action – International Trade Restrictions
Import Tariffs
Korea imports a large quantity of beef. With no beef trade, Korea’s equilibrium price for beef was $8 million per kilo tonne and equilibrium quantity was 375 kilo tonne. If Korea opens its beef market to trade with no tariff, domestic demand would be 625 kilo tonne and domestic supply would be 125 kilo tonne at the world price of $4 million per kilo tonne. However, Korea currently imposes 40 per cent tariff rate on all imported beef. With 40 per cent tariff, Korea’s domestic supply and domestic demand were 250 kilo tonne and 500 kilo tonne respectively in 2013. Assume that intercept of supply curve is $2 million and demand curve is $15 million per kilo tonne.
Import Quotas
With free trade between Australia and Canada, Australia would export beef to Canada. But Canada imposes an import quota on Australian beef.
The volume of import quota on Australian beef is less than Australia’s total export volume of beef to Canada. Explain how this import quota would influence Australia’s beef exports to Canada, consumer price of beef in Australia’s domestic market, consumer surplus (CS) and producer surplus (PS) in Australia.
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Question 3: Answer the following questions
Government Actions in Markets – Price floor
Price
(dollar per tonne) |
Quantity
demanded
(kilo tonnes) |
Quantity
supplied
(kilo tonnes) |
100 | 2,000 | 0 |
150 | 1,400 | 600 |
200 | 1,200 | 800 |
250 | 1,000 | 1,000 |
300 | 800 | 1,200 |
350 | 600 | 1,400 |
400 | 0 | 2,000 |
The table shows the demand and supply schedules for US wheat market. The US Farm Bill 2012 indicates that the domestic price of wheat will be set at $300 per tonne, which is above the market equilibrium level of $250 per tonne, in order to support for domestic wheat growers. At the market equilibrium, 1,000 kilo tonnes (Kt) are supplied.
Let us draw the diagram with the price floor:
Before the price floor consumer surplus= 0.5*(400-250)*1000=75000
After the price floor, consumer surplus= 0.5*(400-300)*800= 40000
Before the price floor producer surplus= 0.5*(250-100) *1000=75000
After the price floor producer surplus= 0.5*(200-100)*800=40000
Deadweight loss= 0.5*(300-200)*(1000-800)
=10000
Global Markets in Action – International Trade Restrictions
Import Tariffs
Korea imports a large quantity of beef. With no beef trade, Korea’s equilibrium price for beef was $8 million per kilo tonne and equilibrium quantity was 375 kilo tonne. If Korea opens its beef market to trade with no tariff, domestic demand would be 625 kilo tonne and domestic supply would be 125 kilo tonne at the world price of $4 million per kilo tonne. However, Korea currently imposes 40 per cent tariff rate on all imported beef. With 40 per cent tariff, Korea’s domestic supply and domestic demand were 250 kilo tonne and 500 kilo tonne respectively in 2013. Assume that intercept of supply curve is $2 million and demand curve is $15 million per kilo tonne.
The world price is $4 million per kilo tonne.
Korea imposes 40% tariif on imports.
The world price will be 4+0.04*4=4+1.6=5.6
The welfare changes can be shown as follows:
Importing Country | |
Consumer Surplus | ? (A+B+C+D) |
Producer Surplus | +A |
Govt. Revenue | +C |
National Welfare | ?B?D |
Loss in consumer surplus= (5.6-4)*250+400+0.5*(625-500)*(5.6-4)
=-900
Government revenue = (5.6-4) *(500-250)= 400
Area B= 0.5*( 5.6-4) * ( 250-125)
=100
Area D = 100
Area B+C+D= 100+400+100=600
Area A= area (A+B+C+D)-(B+C+D)
= 900-600
=300
Producer surplus =+A= 300
National welfare loss =-B-D = -200
Import Quotas
With free trade between Australia and Canada, Australia would export beef to Canada. But Canada imposes an import quota on Australian beef.
Importing Country | |
Consumer Surplus | ? (A+B+C+D) |
Producer Surplus | +A |
Quota rent | +(C+G) |
National Welfare | G?B?D |
1) Import quota increases the prices of imported goods and also the domestic substitutes.
It will lead to reduction in consumer surplus.
2) Producers get higher price and higher profit.
This will lead to increase the producer surplus.
3) Government receives the quota rent.
4) Since there are both positive and negative elements the new effect of national welfare can be
positive or negative.
The interesting result, however, is that it can be positive. The national welfare can be
increased due to import quota.
Exporting Country | |
Consumer Surplus | +e |
Producer Surplus | -( e+f+g+h) |
Quota rent | 0 |
National Welfare | -(f+g+h) |
here will be a decrease in the domestic price.
2) Producers will realize a decrease in well- being.
3)No quota rent for exporting country.
4) Terms of trade effect, consumption distortion and production distortion are the elements
for national welfare. All the components are negative and thus the national welfare is negative.
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