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

(a)

In absence of trade, in equilibrium, quantity demanded equals quantity supplied. So

Equilibrium quantity = 18,000

Equilibrium price = $0.24

Consumer surplus (CS) = Area between demand curve and price = (1/2) x (0.42 - 0.24) x 18,000 = 9,000 x 0.18 = 1,620

Producer surplus (PS) = Area between supply curve and price = (1/2) x (0.24 - 0) x 18,000 = 9,000 x 0.24 = 2,160

Total surplus (net benefit) = CS + PS = 1,620 + 2,160 = 3,780

NOTE: Unless you provide free-trade world price and tariff per unit, parts (e) and (f) cannot be calculated.