T116: Government Actions in Markets – Price floor - International Trade Restrictions - Micro Economics Assessment Answers

August 24, 2017
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Solution Code: 1ECF

Question: Micro Economics Assignment

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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.

  • On a graph, explain how the price control in the US would change the consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. In your explanation, compare and show the changes in surpluses and deadweight loss before and after the price control. Assume that the US does not trade wheat internationally.

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.

  1. Based on the information given above, draw a graph to show the areas of gains and losses from the trade with 40 per cent tariff rate. Then, calculate the actual value of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss before and after the tariff. Show your calculation.

Import Quotas

With free trade between Australia and Canada, Australia would export beef to Canada. But Canada imposes an import quota on Australian beef.

  1. Draw a graph and explain how this quota would influence the consumer prices of beef in Canada, consumer surplus (CS) and producer surplus (PS), benefits of beef importers, and the amount of dead weight loss in Canada.

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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Solution:

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.

  • On a graph, explain how the price control in the US would change the consumer surplus, producer surplus, and deadweight loss in the domestic wheat market. In your explanation, compare and show the changes in surpluses and deadweight loss before and after the price control. Assume that the US does not trade wheat internationally.

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.

  1. Based on the information given above, draw a graph to show the areas of gains and losses from the trade with 40 per cent tariff rate. Then, calculate the actual value of change in consumer surplus, producer surplus, tariff revenue and the amount of deadweight loss before and after the tariff. Show your calculation.

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.

  1. Draw a graph and explain how this quota would influence the consumer prices of beef in Canada, consumer surplus (CS) and producer surplus (PS), benefits of beef importers, and the amount of deadweight loss in Canada.

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.

  1. 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.

Exporting Country
Consumer Surplus +e
Producer Surplus -( e+f+g+h)
Quota rent 0
National Welfare -(f+g+h)

 

  1. The consumers of exporting country will experience an increase in CS because t

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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