Unformatted text preview: EC 340 Spring 2011 Problem Set 6 Suppose that Honduras is a small importer of corn and that the world price of corn is $5 per bushel. The Honduran demand and supply curves for corn are illustrated in the diagram to the right. Note that the supply curve is perfectly inelastic (that is, it is vertical). Suppose that Honduras limits imports of corn to 5 bushels. Use this information to answer questions 1 – 6. 1. What price will Honduran consumers have to pay for corn? 2. What price will Honduran producers receive for corn? 3. What is the size (measured in dollars) of the consumption distortion created by this import quota? 4. What is the size (measured in dollars) of the production distortion created by this import quota? 5. How much quota rent does this import quota generate? 6. Assuming that quota rents are earned by Hondurans, what is the effect of this import quota on Honduran welfare relative to free trade? Suppose that Vietnam is a small exporter of rice and that the world price of rice is $6 per kilogram. Further suppose that the Vietnamese government offers Vietnamese farmers an export subsidy of $2 per kilogram. The Vietnamese demand and supply for rice are shown in the diagram to the right. Use this information to answer questions 7 – 11. 7. What price will Vietnamese consumers pay for rice? 8. How much rice will Vietnam export? 9. What will this subsidy cost the Vietnamese government? 10. What is the size (measured in dollars) of the production distortion created by this subsidy? 11. What is the size (measured in dollars) of the consumption distortion created by this subsidy? 12. What is the gain to the producer from this subsidy? 13. What is the net effect (relative to free trade) of this subsidy on Vietnamese welfare? ...
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- Spring '10
- International Economics, Honduras, import quota, Consumption distortion, production distortion