Question

Assume that Grainland currently produces wheat and does not trade wheat in international markets.

(a) Draw a correctly labeled demand and supply graph for the domestic wheat market in Grainland. Label the equilibrium price, PePe, and the equilibrium quantity, QeQe.
(b) Suppose the price of wheat in the world market is lower than the domestic price of wheat in Grainland. Assume now Grainland wants to trade wheat in the world market.
(i) On your graph from part (a), label the world market price of wheat as PWPW, and identify the domestic quantity demanded of wheat at PWPW, as Q3Q3, and the domestic quantity supplied of wheat labeled as Q1Q1.
(ii) Will Grainland export or import wheat? Explain.
(c) With international trade in wheat, who will benefit in Grainland: domestic producers, domestic consumers, neither or both? Explain.
(d) Suppose that the government of Grainland decides to provide a subsidy for wheat farmers to make the country more competitive and sell wheat at the world market price so that all wheat is produced domestically. Show the effect of the subsidy on your graph in part (a).

Answer 1

a) A demand and supply graph for the domestic wheat market in Grainland can be drawn as follows:

Demand: A downward-sloping curve representing the quantity of wheat demanded at different prices.

Supply: An upward-sloping curve representing the quantity of wheat supplied at different prices.

At the intersection of the demand and supply curves, we have the equilibrium price (PePe) and the equilibrium quantity (QeQe). These represent the market-clearing price and quantity, where the quantity demanded is equal to the quantity supplied.

b) i) On the graph from part (a), we can label the world market price of wheat as PWPW. The domestic quantity demanded of wheat at PWPW is represented by Q3Q3, which is greater than the domestic quantity supplied of wheat (Q1Q1) at PWPW.

ii) Given that the world market price of wheat is lower than the domestic price in Grainland, Grainland will import wheat. This means that the country will purchase wheat from other countries at a lower price than the domestic price, which is more beneficial for consumers.

c) With international trade in wheat, both domestic producers and consumers in Grainland will benefit. Producers will have the opportunity to sell their wheat at the higher world market price, while consumers will be able to purchase wheat at a lower price than the domestic price.

d) If the government of Grainland provides a subsidy for wheat farmers, the supply curve will shift to the right. This means that the quantity of wheat supplied will increase at every price, leading to a new equilibrium at a lower price and a higher quantity. As a result, domestic producers will be more competitive in the world market and consumers will have access to more wheat at a lower price. This policy will benefit both domestic producers and consumers in Grainland.