Question

1) The United States sugar industry has enjoyed trade protection for several years. As a result, sugar prices in the U.S. are higher than the average world price. Suppose that the domestic demand and domestic supply for sugar are as provided in the table below (assume continuous, linear domestic demand and supply curves which include the following data points for sugar): | Price ($ per Quantity Demanded Domestically Quantity Supplied Domestically pound) (Millions of Pounds per Year) (Millions of Pounds per Year) 42,000 0.06 36,000 4,500 0.12 30,000 9,000 0.18 24,000 13,500 0.24 18,000 18,000 0.30 12,000 22,500 0.36 6,000 27,000 0.42 31,500 a. Suppose that, initially, the U.S. is entirely closed to international trade. What equilibrium price and equilibrium quantity would exist in the U.S. in the absence of trade? Calculate the size of the consumer surplus, producer surplus, and net benefits to society that would exist in the U.S. in the absence of trade. (2 points)

Answer 1

ff 0.05 | 0 10000 20000 30000 40000 50000

a) Equilibrium price = 0.24

Equilibrium quantity = 18000

CS = 0.5*18000*(0.42-0.24) = 1620

PS = 0.5*18000*(0.24-0) = 2160

TS = CS+PS = 3780

b) The US will become a net importer because the world price is lower than the equilibrium price

Imports = 30000-9000 = 21000

c) Change in CS = +B+D+E =18000*0.12 + 0.5*(30000-18000)*0.12 = 2160+720 = +2880

Change in PS = -B = 9000*0.12 + 0.5*(18000-9000)*0.12 = 1080+540 = -1620

+-os World price 0 10000 20000 30000 40000 50000

Net Benefits = (1620+2880)+(2160-540) = 4500+1620 = 6120

so, Net benefits increases by D+E= 6120-3780 = 2340

d)

QD WP+TARIFS World price 0.05 05 0 10000 20000 30000 40000 50000

With the tariff, the price increases to 0.12+0.06 = 0.18

where QD = 24000 and QS = 13500

So, Imports decreases from 21000 to 24000-13500 = 10500