Question

China is a major producer of grains such as wheat, corn, and rice. Assume that it is also an exporting country in the market for grain. 

Suppose the following graph depicts the market for grain in China. 

On the graph below, show the impact opening up to international trade has on the domestic price for grain by shifting the price line up or down to reflect the world price of grain. 

Note: Select and drag the curve to the desired position. The curve will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 

 Some years ago, the Chinese government, concerned that grain exports were driving up food prices for domestic consumers, imposed a tax on grain exports.

 Suppose the Chinese government imposed a tax of $1 per bushel on grain exports. The following graph depicts the market for grain in China. Use this graph to answer the following questions. (Note: You will not be graded on any changes made on this graph.)

 When China opens up to trade, the domestic price of grain will to _______ . An export tax of $1 per bushel will then _______   the domestic price of grain to _______ 

 Compare each of the market conditions before and after the export tax of $1 per bushel in the following table. (Note: Assume China is open to trade in both scenarios.)

Answer 1

Blank 1= Increase

Blank 2=8$

Blank 3=Decrease

Blank 4=7 $

Before export tax,

Domestic CONSUMER welfare=1/2*(10-8)*2=2

Produer surplus=1/2*8*8=32

Goverment revenue=0

Chinese welfare=CONSUMER welfare+ produer welfare=2+32=34

After tax,

CONSUMER surplus=1/2*(10-7)*3=4.5

Produer surplus=1/2*7*7=24.5

Goverment revenue=1*(7-3)=4

Chinese welfare=CONSUMER surplus+ produer surplus=4.5+24.5=29