Assignment Questions

Question 1: Assume this country is a SMALL country so that its actions do not affect world prices

(a) On a piece of paper draw a supply curve (labeled S₀) and a demand curve (labeled D) for a generic commodity on the same graph.

(b) Draw an equilibrium world price in free trade (P_F) that is ABOVE the equilibrium price that would exist in autarky.

(c) Label the equilibrium quantity supplied (Q_F^S), the equilibrium quantity demanded (Q_F^D), the equilibrium price (P_F) and the quantity exported (X_F) under free trade.

(d) Suppose that the government introduces Price Loss Coverage (PLC) that guarantees producers a reference price (P_T) that is higher than the free trade price PF and, at the same time, they impose a set-aside requirement (represented by an inward shift of the supply curve rotated around the shut-down price from S₀ to S₁) such that the quantity supplied under PLC (with set-aside) is LARGER than the quantity supplied in the absence of the PLC (without set-aside) note: this requires a relatively small inward shift of the supply curve. First, draw and label the reference price (P_T). Second, label the equilibrium quantity supplied under PLC in combination with the set-aside requirement (Q_T^S). Third, label the equilibrium quantity demanded under PLC in combination with the set-aside requirement (Q_T^D). Fourth, label the exports under PLC in combination with the set-aside requirement on the X-axis (X_T).

(e) Label all possible areas under the graph formed by the intersection of the lines on the graph starting from area A in the upper left-hand corner and continuing towards the lower right-hand corner.

(f) Write out consumer surplus (CS_F) under free trade using the areas from (e).

(g) Write out producer surplus (PS_F) under free trade using the areas from (e).

(h) Find total welfare for this country under free trade using the areas from (e).

(i) Write out consumer surplus (CS_T) under PLC in combination with the set-aside using the areas from (e).

(j) Write out the areas that represent PLC payment that the government pays producers under the reference price in combination with the set-aside and label it as government revenue (GRT). Note: this must be negative since the government is PAYING producers with taxpayer's money.

(k) Write out producer surplus (PS_T) under PLC in combination with the set-aside using the areas from (e). Note: the producer surplus under PLC must be measured off the new supply curve (S₁).

(l) Find total welfare for this country under the PLC in combination with the set-aside using the areas from (e).

(m) Find the difference between consumer surplus in (i) and (f). Are consumers better or worse off under PLC in combination with the set-aside when compared to free trade?

(n) Find the difference between producer surplus in (k) and (g). Are producers better or worse off under PLC in combination with the set-aside when compared to free trade?

(o) Find the difference between total welfare in (l) and (h). Remember to include the loss to taxpayers from (j). Is this country better or worse off under the target price in combination with the set-aside?

(p) What is the deadweight loss to this country caused by the PLC in combination with the set-aside (in terms of areas)?

Question 2: Refers to the article entitled "Look for Hidden Costs" downloadable on Blackboard.

a) After reading the "Look for Hidden Costs" article, please type a 500 word essay summarizing its major points. Be sure to write the summary IN YOUR OWN WORDS (no cutting and pasting). When reading the article and relating it to the lectures, you need to realize that the article uses terminology from past Farm Bills. You need to be aware that "deficiency payments" referred to in the article are similar to "price loss coverage" (PLC) payments in the 2014 Farm Bill and that the "target prices" referred to in the article are similar to "reference prices" in the 2014 Farm Bill.

b) In a separate discussion, please provide a brief explanation of how the welfare analysis you performed in question 1 of this assignment (above) and question 4 of assignment 1 relate to corn and sugar within the context of the article. You should specifically relate the deadweight loss areas in question 1 of this assignment and question 4 of assignment 1, to the discussion in the article to describe how a direct subsidy (PLC for corn) benefits the United States more than a "no cost" trade barrier (import quota on sugar). You should describe the exact correspondence between the numbers provided in the table of the article and the areas in the graphs you drew for question 1 of this assignment and question 4 of assignment 1. Make sure you assign specific numbers in the article to the specific letter(s) representing the areas in the figures you drew!