A country imports 5 million pounds of sugar per year and domestically produces another 5 million pounds. The world price of sugar is 25 cents per pound, and unlimited quantities of sugar are available at that price—the world supply curve of sugar is perfectly elastic. Assuming linear schedules, economists estimate the price elasticity of domestic supply to be 0.3 and the price elasticity of domestic demand to be 0.15 at the current equilibrium.
a. Use the given price elasticity and market equilibrium data to derive the domestic sugar demand and supply equations, and graph your results.
b. If no sugar could be imported, compute and show (on the graph created for (a)) the equilibrium domestic sugar price and quantity.
c. Compute and show on your graph the change in Consumer Surplus and Producer Surplus that free trade makes possible. That is, compare the situation when no imports are allowed to the situation first described in the question.
d. How would you measure the efficiency consequences of placing a ban on all sugar imports?
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