Internal Code: MAS536
Question 3: Government Actions in Markets – Price floor
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.
(a) 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.
(b) 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.
With free trade between Australia and Canada, Australia would export beef to Canada. But Canada
imposes an import quota on Australian beef.
(c) 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.
(d) 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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