Question

Please complete all questions.

Question 5: Let us say that the U.S. pays import subsidy to import sunflower seeds. Let the free market price of sunflower seeds be $10 per pound. An import subsidy of $2 increases the international price of sunflower seeds to $11.50 per pound. Quantity produced in free trade: 25 million pounds Quantity imported in free trade: 20 million pounds Quantity produced with import subsidy: 10 million pounds Quantity imported with import subsidy: 50 million pounds a. Draw graphs for the U.S. and its partner country to examine the welfare effects of this policy. (5 points) b. Calculate the following: (i) Change in Consumer Surplus in the U.S.(3 points) (ii) Change in Producer Surplus in the U.S. (3 points) (iii) Subsidy Payment to Sunflower importers in the U.S.(3 points) (iv) Subsidy benefits transferred to Sunflower exporters (3 points) (v) Total Welfare Loss in the U.S. (3 points)

Answer 1

The free market price of $10 is shown in both graphs. At free market price of $10, quantity produced= 10 million pounds and quantity imported = 20 million pounds. Total quantity consumed thus 20+25= 45 million pounds.

As import subsidy increases the price to $11.50 (shown in market of partner country), the consumers in US pay only $11.50 - $2 (import subsidy)= $9.50 (shown in US market).

Under import subsisdy price of $9.50, quantity produced= 10 million pounds and quantity imported = 50 million pounds. Total quantity consumed thus 10+ 50=60 million pounds.

(a) US Partner Country $11.501 $100 a $9.50 10 25 4560 (6).(i) change in consumer surplus in us = Area a tbtc = (0.5)(0.50) (45+60) - 26-25 million (ii) change in producer surplus in US = - ca+b)' = -(0.5) (0.5) (10725) = -8-75 million (iii) subsidy payment to sunflower importers in js = $2 X 50 5-$100 million (iv) subsidy benefits transferred to sunflower exporters = $1.50 X 50 = - $75 million (u) Total welfare loss in usa Dead weight loss t subsidy benefits transferred to exporters = - (0.5 x 0.5 x 15 * 0.5X0.5 X 15 )-75 = $82.50 million