5. Rice is traded in a competitive world market and imported into Bangladesh at a world price of $9 per pound. U.S.

domestic supply and demand for various price levels are shown in the following table. Price BD Supply (Million Pounds) 2 4 6 8 10 12 BD Demand (Million Pounds) 34 28 22 16 10 4

3 6 9 12 15 18

a) Confirm that the demand curve is given by QD = 40-2P, and that the supply curve is given by QS = b) Confirm that if there were no restrictions on trade, Bangladesh would import 16 million pounds. c) If Bangladesh imposes a tariff of $3 per pound, what will be the BD price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss? d) If the Bangladesh has no tariff but imposes an import quota of 8 million pounds, what will be the BD domestic price? What is the cost of this quota for BD consumers of the rice? What is the gain for BD producers? Explain

a) Confirm that the demand curve is given by QD = 40-2P, and that the supply curve is given by QS = In order to find the equation of demand, we have to find out the linear function QD = a + bP. So that the line it represents passes through two of the point in the table here we have taken (9, 22) and (6, 28). First we need to find the slope b that is rise divided by the run

Second, we substituted for b and one point, into the linear function to solve for the constant, a: 22 = a-2(9) a=22+18 a = 40 So, QD = 40-2P Similarly in order to find out the equation of supply, we have to solve the supply equation QS = c + dP so that it passing through two points such as (12, 8) and (9, 6). The slope, d, is:

Second, we substituted for d and one point, into the linear function to solve for the constant, c: 8 = c+ (12) or c = 0 So, QS = b) Confirm that if there were no restrictions on trade, Bangladesh would import 16 million pounds. If there were no trade restrictions, the world price of $9.00 would prevail in Bangladesh. From the table, we found out that at $9.00 domestic supply would be 6 million pounds. And, domestic demand is 22 million pounds. Import is the difference between domestic demand and domestic supply, so import amount would be 22 6 = 16 million pounds.

c) If Bangladesh imposes a tariff of $3 per pound, what will be the BD price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss?
P S

12 9

D Q 6 8 16 22

When Bangladesh imposes a tariff of $3, Price will be $12 (the world price plus the tariff). At this price, demand is 16 million pounds and Bangladesh supply is 8 million pounds. Therefore Import will be difference domestic demand and domestic supply = 16-8= 8 million pound of rice is imported. The government will collect $3(8) = $24 million, which is area C in the diagram above. To find deadweight loss, we have to determine the changes in consumer and producer surpluses. Here are after Bangladesh imposed tariff the price rose to $12. Consumers lose the area A + B + C + D because they now pay the higher price of $12 and purchase fewer pounds of rice. On the other hand Bangladesh producers gain area A because they are getting higher price after imposition of tax and also can sell greater quantity. Therefore the deadweight loss is the loss in consumer surplus minus the gain in producer surplus and the tariff revenue. DWL = B + D = (12-9) (8-6) + (12-9) (22-16) =$12 million. d) If the Bangladesh has no tariff but imposes an import quota of 8 million pounds, what will be the BD domestic price? What is the cost of this quota for BD consumers of the rice? What is the gain for BD producers? Explain

If Bangladesh imposes import quota of 8 million pounds, the domestic price will be $12. At $12, the difference between domestic demand and domestic supply i.e. 16 million pounds minus 8 million pounds is 8 million pounds.

Alternatively we can also find the equilibrium price by setting demand equal to supply plus the quota so that 40-2P = or 40 - 8 =2P + or 32 = or P = P= P= 12
P S

12 9

D Q 6 8 16 22

The cost of the quota to consumers is equal to area A + B + C + D in the figure above, which is the reduction in consumer surplus. This equals to (12 9) (16) + 12 9) (22 16) = $57 million.

The gain to domestic producers (increase in producer surplus) is equal to area A. equal to (12 9)(6) + (8 6)(12 9) = $21 million.