Purchase Solution

# Calculate the change in consumer surplus

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Rice is traded in a competitive world market. At the world price of \$0.10 per pound, unlimited amounts of rice can be imported into Japan for purchase in the Japanese rice market. (e.g. There is an infinite supply of rice at the world price of \$0.10 per pound.)

The domestic demand and supply of rice in Japan is given by: (see attachment)

Quantity is measured in millions of pounds of rice, and the price is given in dollars per pound.

Question 4.1 Calculate the equilibrium quantity of rice consumed in Japan at the world price of \$0.10 per pound, and indicate the quantity of rice imports at the world price. Sketch a graph to illustrate the Japanese rice market under free trade, clearly labeling the effective supply curve in the Japanese market and the level of imports.

Question 4.2 Now, suppose the Japanese government decides to restrict rice imports by imposing a quota of 6 million pounds of rice. Essentially, this quota is equivalent to shifting the domestic supply curve to the right by six million pounds, so we can construct avirtual supply curve: (see attachment)

NOTE: This is just a construct that will help solve for equilibrium price and quantity under the quota.

Calculate the new equilibrium price and quantity of rice in Japan, and indicate the level of domestic rice production. Once again, sketch a graph of the Japanese rice market to illustrate the effect of a rice import quota of 6 million pounds

Question 4.3 Calculate the change in consumer surplus caused by imposing the rice import quota of six million pounds.

##### Solution Summary

Calculate the new equilibrium price and quantity of rice in Japan, and indicate the level of domestic rice production. Once again, sketch a graph of the Japanese rice market to illustrate the effect of a rice import quota of 6 million pounds

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