Question

The European Union (EU) and United States (US) demand and supply equations for corn are: QDEU = 70 – 2 PEU QSEU = 20 + 3PEU QDUS = 130 – 3PUS QSUS = 30 + PUS where QD and QS represent the quantities demanded and supplied in both countries (in billions of tons) and P represents the Dollar price per ton of corn in each country.

Now assume that there is free trade between the European Union and US.

d. Determine the international equilibrium price of corn (per ton).

e. How much corn is produced and consumed in the European Union and US.

f. How much corn is traded between the two regions. Draw graphs to represent the market situation before and after trade. Suppose now that the European Union limits its imports of corn to 14 billions of tons.

g. What will be the new equilibrium prices of corn in the European Union and US?

h. What are the new domestic production and consumption levels in each region? How much corn is traded?

Answer 1

The EU demand and supply curves are given as and , while of US are given as and .

(a) The graph of the EU market is given as below. The intercepts of the demand curve will be 70 at Q-axis and 35 at P-axis, found by putting zero in the other variable. Similarly, the intercept of the supply curve will be 20 at Q-axis.

The graph of the US market is given as below. The intercepts of the demand curve will be 130 at Q-axis and 130/3 or 43.333 at P-axis. Similarly, the intercept of the supply curve will be 30 at Q-axis.

(b) The equilibrium prices in absense of trade in EU will be where quantity demanded is equal to the quantity supplied, ie , or or .

The equilibrium prices in absense of trade in EU will be where quantity demanded is equal to the quantity supplied, ie or or .

(c) In EU, at $20, which is above the equilibrium price and hence there will be excess supply, the and , ie an excess supply of 50 untis.

In US, at $20, which is below the equilibrium price and hence there will be excess demand, the and , ie an excess demand of 20 units.

(d) The international equilibrium price if trade opens will be founded by equating the export supply and import demand. As equilirbium price in EU is less than US, the EU will be the exporter, while US will be the importer. Now, the export supply function will be the excess supply function of the EU, which is or or . The import demand function of the US will be the excess demand function of the US, whcich is or or . The equilibrium world price will be where the import demand is equal to the export supply, ie or or dollars, which will be the world price.

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