2. Dual track system (25 pts). Consider the market for cotton. 20 15 Market for Cotton 2 4 6 8 10 12 14 16 18 20 Quantity of Cotton Marginal Benefit .... Marginal Cost The marginal benefit for the consumers is MB = 20 - Q and the marginal cost for the producers is MC = Q. There is no fixed cost. (a) (10 pts) Suppose that the economy is under the command economy. Cotton is sold at procurement price Pg = 4 with procurement quota Q, = 6. Under this situation, what are consumer surplus and producer surplus? (b) (10 pts) Suppose the economy is transformed into a dual-track system, the government mandates that the first Qg = 6 units output must be sold at planned price Pg = 4, but beyond this quota, the producer can sell the rest of the output at the market price (calculated in part (b)). What are the new consumer and producer surplus? Explain how your answers change from part (a). (c) (5 pts) Compare parts (a) and (b). Discuss why the first phase of the reform in China from 1978 to 1989 is called "reform without losers". Price of Cotton 0 0 ...... 2. Dual track system (25 pts). Consider the market for cotton. 20 15 Market for Cotton 2 4 6 8 10 12 14 16 18 20 Quantity of Cotton Marginal Benefit .... Marginal Cost The marginal benefit for the consumers is MB = 20 - Q and the marginal cost for the producers is MC = Q. There is no fixed cost. (a) (10 pts) Suppose that the economy is under the command economy. Cotton is sold at procurement price Pg = 4 with procurement quota Q, = 6. Under this situation, what are consumer surplus and producer surplus? (b) (10 pts) Suppose the economy is transformed into a dual-track system, the government mandates that the first Qg = 6 units output must be sold at planned price Pg = 4, but beyond this quota, the producer can sell the rest of the output at the market price (calculated in part (b)). What are the new consumer and producer surplus? Explain how your answers change from part (a). (c) (5 pts) Compare parts (a) and (b). Discuss why the first phase of the reform in China from 1978 to 1989 is called "reform without losers". Price of Cotton 0 0