Q11. Example 9.6 (page 353) describes... [FREE SOLUTION]

Chapter 9: Q11. (page 365)

Example 9.6 (page 353) describes the effects of the sugar quota. In 2016, imports were limited to 6.1 billion pounds, which pushed the domestic price to 27 cents per pound. Suppose imports were expanded to 10 billion pounds.
a. What would be the new U.S. domestic price?
b. How much would consumers gain and domestic producers lose?
c. What would be the effect on deadweight loss and foreign producers?

Short Answer

Expert verified

The new U.S. domestic price would be 23.92 cents.
Consumers would gain 2.29 billion pounds, and producers will lose 9.83 billion pounds.
The deadweight loss will reduce, and foreign producers will be benefitted from this policy.

Step by step solution

Calculating the new U.S. domestic price.

The government increases the quantity of imports to 10 billion pounds. Import is the difference between the quantity demanded and quantity supplied. The new U.S. domestic price will be determined by equating the quantity of imports with the difference between quantity demanded and quantity supplied.

$Q u a n t i t y D e m a n d e d - Q u a n t i t y S u p p l i e d = I m p o r t s 31.20 - 0.27 P - (- 8.95 + 0.99 P) = 10 31.20 + 8.95 - 10 = 0.27 P + 0.99 P P = 23.92$

The new U.S. domestic price will be 423.92 cents.

Step 2. Gain to consumers and loss to producers.

Gain to consumers: The gain to consumers is equal to the product of an increase in quantity demand and an amount of reduction in the price level. The increase in quantity demand and reduction in price level is calculated below:

$N e w D e m a n d = 31.20 - 0.27 (23.92) = 31.20 - 6.46 = 24.74$

$I n c r e a s e i n Q u a n t i t y d e m a n d = N e w D e m a n d e d Q u a n t i t y - O l d D e m a n d e d Q u a n t i t y = 24.74 - 24 = 0.74 R e d u c t i o n i n p r i c e l e v e l = N e w P r i c e - P r e v i o u s P r i c e = 27.02 - 23.92 = 3.1$

The gain to consumers is calculated by multiplying the reduction price level and increased quantity of demand at the new price level:

$G a i n t o c o n s u m e r s = R e d u c e d P r i c e 脳 I n c r e a s e d D e m a n d = 3.1 脳脳 0.74 = 2.29$

Step 3. Impact on deadweight loss and foreign producers.

The increase in imports has reduced the gap between the U.S. domestic sugar prices in the world market. It will reduce the loss to society because of import restrictions. Thus, the deadweight loss will decrease.

The increase in the quantity of imports will allow foreign producers to sell more sugar in the U.S. market. Since the price of sugar of foreign producers is lower than the price of sugar supplied by U.S. producers, the consumers will consume the increased quantity of imports. Hence, the foreign producers will gain more returns because they can sell more quantity in the U.S. market.