Question

The US domestic market of sugar is descried by the following domestic supply and demand equations:

QdUS =6000 - 40 P QsUS -2000 + 60 P

C. What is the market equilibrium price fo sugar? How much sugar is sold at this price? At his market price, what are revenues for sugar producers?

B. Now, supposed that due to cheap labor in China, a new US company builds a production facility in China to producee sugar eclusively for the US market. Assume that the supply equation of the new US company in China is

QsF =-2000 +50P

C. At this new equilibrium price, how much sugar will US farmers produce? How much will be consumed in the US and how much will be purchased from abroad? What will be revenues from sugar for the US domestic and for the new US company in China?

Answer 1

(A) In equilibrium, QdUS = QsUS

6,000 - 40P = - 2,000 + 60P

100P = 8,000

P = 80

Q = 6,000 - (40 x 80) = 6,000 - 3,200 = 2,800

Revenue = P x Q = 80 x 2,800 = 224,000

(B) Total supply in US (QT) = QsUS + QsF

QT = - 2,000 + 60P - 2,000 + 50P

QT = - 4,000 + 110P

Equating QdUS and QT,

6,000 - 40P = - 4,000 + 110P

150P = 10,000

P = 66.67

QT = 6,000 - (40 x 66.67) = 6,000 - 2,666.8 = 3,333.2

(C)

Sugar produced by US farmers (QsUS) = - 2,000 + (60 x 66.67) = - 2,000 + 4,000.2 = 2,000.2

Total consumption is US (QT) = 3,333.2

Sugar purchased from abroad (QsF) = QT - QsUS = 3,333.2 - 2,000.2 = 1,333

Domestic revenue = P x QsUS = 66.67 x 2,000.2 = 133,353.33

Revenue for US company in China = P x QsF = 66.67 x 1,333 = 88,871.11