Question

1,2,3) Assume the US market of sunflower oil was described by the following domestic supply and demand equations:

QDUS = 8000 – 4 P

QSUS = -2000 + 6 P

where QDUS and QSUS represent the quantities demanded and supplied (in tons) and P is the price per ton of sunflower oil (in $).

4) Now add this information:

In 2008, China entered into the World Trade Organization and became the largest importer of US sunflower oil. Assume the Chinese import demand for sunflower oil from the US in 2008 was

QDCHINA = 20000 – 10 P

1) What was the market (equilibrium) price of sunflower oil?

2) Using your work in question 1, what was the market (equilibrium) quantity of sunflower oil?

3) Using your work in questions 1 and 2, what were revenues for the suppliers of sunflower oil?

4) Given this information, what was the new equilibrium price of sunflower oil in 2008? (Hint: what is the total demand for US sunflower oil?)

5) Given the price you calculated in the previous question, what was the equilibrium total quantity demanded?

6) Given your answers in the previous 2 questions, how much of the new equilibrium quantity was consumed in the US (i.e., US quantity demanded given the new equilibrium price)?

7) Given your answers in the previous three questions, how much sunflower oil did China purchase from US producers? (i.e., China quantity demanded)

8) Given your calculations in questions # 4 and #5, what were US sunflower oil producer revenues?

Answer 1

Ans-1) Market Equilibrium is attained when QD=QS . So, we equate the equations of demand and supply and get ,

QDUS = QSUS

8000-4P = -2000 + 6P

8000+2000 = 6P+4P

10P = 10,000

P = 10,000/10

P = $1,000

Therefore,market equilibrium price = P = $1,000.

Ans-2) To obtain market equilibrium quantity , substitute the equilibrium price (from Q1) in any equation [either demand or supply as at equilibrium both the quantities are equal].

QDUS = 8000 - 4P

= 8000 - 4(1,000)

= 8000 - 4000

= 4000

Therefore , market equilibrium quantity = Q = 4000 tons.

Ans-3) Revenue for the suppliers of sunflower oil = Market Price of sunflower oil (Quantity of sunflower oil )

= 1000(4000)

Revenue for the suppliers of sunflower oil = $ 4,000,000

Ans-4) Now in 2008 , China has also entered WTO and has become largest importer of sunflower oil from U.S.

QDCHINA = 20,000 - 10P

Total Demand of U.S. SUNFLOWER OIL = QDUS + QDCHINA

= 8000 - 4P + 20,000 - 10P

= 28,000 - 14P

Total Market Supply is same as before = QSUS = -2000 +6P

  

Market Equilibrium is reached when Total market demand = Total market supply

28,000 - 14P = -2,000 + 6P

28,000 + 2,000 = 14P + 6P

20 P = 30,000

P = 30,000/20

P = $ 1,500

New equilibrium Price = $1,500.