Question

Scenario 2 17.

Suppose Thailand is a large country. Thailand’s demand and supply curves for rice are:

D* = 9,800 – 200P

S* = -200 + 200P

b. Suppose the free trade world price is $32 per bushel

i. In the absence of any barriers to trade, what is the domestic consumption and production? How much is exported?

ii. What is the consumer surplus, producer surplus & gov’t expenditure at price = $32?

Answer 1

The equilibrium in the absence of trade is at Qd=Qs

equating both equations

9800-200P=-200+200P

400P=10000

P=25

Q=9800-200*25

Q=4800

The price of rice in the absence of trade is $25

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b)

i)

After the economy opens up the

P=$32

Qd=9800-200*32

=3400

Qs=-200+200*32

=6200

the domestic consumption is 3400 units

The domestic production is 6200 units

Export =Qs-Qd=6200-3400

=2800 units

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ii)

CS is the area above price and below the demand curve

CS=0.5*(Y-axis intercept of the demand curve -P)*Qd

=0.5*(49-32)*3400

=$28900

PS is the area below price and above the supply curve

PS=0.5*(P- Y-axis intercept of the supply curve)*Qs

=0.5*(32-1)*6200

=$96100

there is no government expenditure as the government is no providing any subsidy.