Question
Consider a closed economy. Suppose the market for corn in the Banana Republic is competitive. The domestic market demand function for corn is Qd= 18-P
Consider a closed economy. Suppose the market for corn in the Banana Republic is competitive. The domestic market demand function for corn is Qd= 18-P and the domestic market supply is Qs=P-2, both measure in billions of bushel per year. In order to help the corn industry, the government initiated a price support program by purchasing 2 billion bushels corn in the market.
The demand and supply function from above but now assume the import supply curve is infinitely elastic at a price of $4 per bushel.
(a) Suppose the government imposes a tariff of $3 per bushel. Calculate the new equilibrium price and quantity. Calculate the total willingness to pay for the domestic consumers, domestic producer surplus and deadweight loss.
(**I was having a hard time drawing a graph**)
(b) Now suppose instead of using a tariff alone, the government uses a policy combination by imposing a tariff of $2 per bushel and an import quota of billion bushels at the same time. Draw a graph to show the consumer surplus, producer surplus, government revenue and deadweight loss without calculating the numbers.
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