1.Suppose the demand curve for sugar in the U.S. is given by the equation Q_d=100-10P, where Q is in million tons per year and P is in thousand yuan per ton of rice.The supply curve is Q_s=20P-20.Suppose further that the government arranges for the sugar farmers to supply a total of 40million tons of sugar a year, and it pays a fixed procurement price 2,000 dollars per ton.The government then sells the sugar in the urban areas for 3,000 dollars a ton.

a)What will be the consumer surplus, producer surplus and government revenue under this scheme?

b)Is the scheme efficient?If not, what is the deadweight loss?

c)Do you expect a black market for sugar to develop?If the government can stop sugar farmers from selling sugar outside the government procurement agency, but it cannot stop the urban residents from reselling sugar, what do you expect the black market price to be?

2.Under a "household responsibility" system intended to boost production and alleviate shortages of food, the sugar farmers still have to supply the earlier quota to the government for the same price, but now they are free to produce more than the quota, and they can sell the surplus in a free market.The government still resells the procured quota at 3,000 dollars a ton.

d)How much will the sugar farmers produce?What will be the free market price?

e)Is the new system economically efficient?If not, what is the deadweight loss?

f)What are the consumer surplus, producer surplus, and government revenue under the new scheme?Who wins and who loses compared to the original system?

3.Suppose the market for sugar is completely liberalized - the government does not procure anything, and all sugar bought and sold in a free market.

g)(How much will be produced?What will be the market price?

h)Is that system economically efficient?If not, what is the deadweight loss?

i)What are the consumer surplus, producer surplus, and government revenue in the free market?Who wins and who loses compared to the original system in part (a)?

j)Suppose the fixed costs of sugar production is 5 bln yuan a year.Would sugar farmers voluntarily produce rice under the first (command) system?Under the second (household responsibility) system?Under the third (free market) system?