Question

2. The European Union (EU) and United States (US) demand and supply equations for corn are:

QDEU = 70 – 2P

QSEU = 20 + 3P

QDUS = 130 – 3P

QSUS = 30 + P

where QD and QS represent the quantities demanded and supplied in both countries (in billions of tons) and P represents the Dollar price per ton of corn in each country.

Now assume that there is free trade between the European Union and US.

e. How much corn is produced and consumed in the European Union and US.

Suppose now that the European Union limits its imports of corn to 14 billions of tons.

g. What will be the new equilibrium prices of corn in the European Union and US?

h. What are the new domestic production and consumption levels in each region? How much corn is traded?

Answer 1

e. AT EU

QDEU = 70 – 2P

QSEU = 20 + 3P

At equilibrium, QDEU = QSEU

70 - 2P = 20 + 3P

5P = 50

P = 10

QDEU = 70 - 2*10 = 50

QSEU = 20 + 3*10 = 50

FOR US

QDUS = 130 – 3P

QSUS = 30 + P

At Equilibium, QDUS = QSUS

130 - 3P = 30 + P

4P = 100

P =25

QDUS = 130 - 3*25 = 55

QSUS = 30+ 25 = 55

g. ImportEU = 14

MDEU (import demand of EU) = QDEU -QSEU = 14

90 - 5P =14

104 = 5P

P^* = 20.8

The new equilibrium price will be 20.8

h. AT EU

QDEU = 70 – 2P

QSEU = 20 + 3P

At equilibrium, QDEU = QSEU, given P^* = 20.8

QDEU = 70 - 2*20.8 = 28.4

QSEU = 20 + 3*20.8 = 82.4

FOR US

QDUS = 130 – 3P

QSUS = 30 + P

At Equilibium, QDUS = QSUS, given P^* = 20.8

QDUS = 130 - 3*20.8 = 67.6

QSUS = 30+ 20.8 = 50.8