Effects of Subsidy

Butterz

Hey there,
Just strugglin with a question.
Hoping ye can help
Thanks
Diagram is attached



If the US economy was closed to world trade US cotton prices would be $1500 per ton and US output would be 35 millions tons each year, as depicted in Diagram B2. Assume there is a perfectly elastic supply of world cotton at $1,200 per ton.

If the US Government does not subsidise US cotton growers then the amount and value of cotton that the US importsfrom the rest of the world would be:

Answer: Amount:____________________ Dollar Value:_______________

If the US government gives US cotton growers a subsidy of $700 per ton of cotton they grow then the amount of cotton that US farmers will grow and the total revenue, including subsidies, that they will receive are:

Answer: Amount:______________ Revenue Dollar Value:______________


As a result of the subsidy the US cotton trade balance with the rest of the world is:
Answer: Amount:____________________ Dollar Value:_______________

The dollar amount of cotton subsidies that the US government pays to US cotton each year growers is;

Answer: _______________________________________________________

The Deadweight loss of the US cotton subsidy to the US economy is:

Answer:______________________________________________________

Économiste Monétaire

God, I hate Micro.

First, if it's a closed economy then it imports nothing. Assuming that question 1 implies they've opened up to trade (without any tariffs or quotas) and they don't subsidise the U.S. firms, then the prevailing price will be $1,200. U.S. firms will be willing to supply 15 million tons at that price, demand at that price is 40 tons. So if demand is 40 and supply is only 15, then you'll import 25 (quantity) at a value of $1,200 per ton x 25 million tons = $30,000,000,000.

With the subsidy they can undercut the world price, so you look at where QSsub = Dus => $975 = 42.75. $975 per ton x 42.75 million tons = $41,681,250,000. You need to add the subsidy, so it's $700 x 42.75 million tons = $29,925,000,000. Add those two answers together and you get $71,606,250,000.

Question 3: 55 - 42.75 = 12.25 million tons. Multiple that by $1,200 per ton and you'll get the value of the trade.

Question 4 is 55 million tons x $700 per ton, so multiple that out.

Question 5: I'll let you figure that out.

Check for any arithmetic errors, and one of the Micro nerds can give a better/more comprehensive answer.

Butterz

Économiste Monétaire wrote: »

Question 4 is 55 million tons x $700 per ton, so multiple that out.

Thanks a mill:eek:

Just wondering why its 55 million tons and not 42.75m

Économiste Monétaire

Butterz wrote: »

Thanks a mill:eek:

Just wondering why its 55 million tons and not 42.75m

Well, the question states that the subsidy is per ton produced. They supply the domestic market with 42.75 million tons and export the rest up to where P = $1,200, which is 55 million tons produced in total (see where the supply curve with the subsidy crosses the world price). The question doesn't distinguish between domestic and foreign purchasers, it's just on subsidy per ton produced.

Butterz

Économiste Monétaire wrote: »

With the subsidy they can undercut the world price, so you look at where QSsub = Dus => $975 = 42.75. $975 per ton x 42.75 million tons = $41,681,250,000.
You need to add the subsidy, so it's $700 x 42.75 million tons = $29,925,000,000. Add those two answers together and you get $71,606,250,000.

Me again

Why is the subsidy here not multiplied by 55mill tons?

Économiste Monétaire

Whoops, I was just taking into account the revenue for domestic market.

It's better for the firms with the subsidy to charge $1,200 to both markets: ($1,200 x 55 million tons) + ($700 x 55 million tons).

Butterz

K.
I think i get it so.

Thanks for the quick replies.:cool:


Now ill try to work out q5 lol

Économiste Monétaire

I've assumed a level price discrimination in that, though. You could also consider, when the have the subsidy, the U.S. firms charging $1200 to both domestic and foreign markets. You get a different answer, and the trade balance is 15, rather than 12.5, million tons.

Time Magazine

Économiste Monétaire wrote: »

God, I hate Micro.

Banned.

nesf

Économiste Monétaire wrote: »

God, I hate Micro.

My opinion of you just went up in the world...