The Demand and Supply Functions of the Food Grains in Country

Essay

The demand and supply functions of the food grains in country X are as follows:
Q_D = 150 - 0.6P
Q_S = -40 + 0.5P
where Q_D and Q_S are in millions of tons and P is the price per ton. The world price of grain is $200 per ton. The figure given below illustrates the demand and supply functions of food grains in country X.
a.In a situation of free trade, how much food grains would be produced, consumed, and traded in country X?
b.As a response to alleged unfair foreign practices, the U.S.farmers successfully lobby for a $20 export subsidy per ton of the grains exported.Assuming that country A is a "small country" in the world grain markets, and that imports of food grains are banned, illustrate the impact of the export subsidy on domestic prices, consumption, production, and exports of grain by this country.Also indicate the welfare effects on producers and consumers.Calculate the cost of the subsidy to the government, and the overall change in welfare in country A.