Much of the demand for Canadian agricultural output has come from other countrie
ID: 1169322 • Letter: M
Question
Much of the demand for Canadian agricultural output has come from other countries.
Suppose, in 2014, the total demand for Canadian wheat was QD = 3244 - 283p, where price is measured in dollars per bushel and quantities in millions of bushels per year. of those, the demand of Canadian consumers was QDCND = 1244 - 83p.
The supply of Canadian wheat in 2014 was QS = 1872 + 207p.
a) Compute the equilibrium price of Canadian wheat in 2014. What was the total revenue of Canadian wheat farmers?
Suppose the export demand for Canadian wheat expects to fall by 20% in 2015. On the other hand, the 2015's demand of Canadian consumers and the supply of Canadian wheat remain the same as the 2014's.
b) By how much do you expect the total revenue of the wheat farmers fall this year? (Hint: To find the export demand for wheat, you subrat the demand of Canadian consumers QDCND from the total demand QD.
c) Suppose now the Canadian government wants to buy enough wheat to raise the price to the 2014 level. How much wheat would the governmetn have to buy? How much would this cost the government?
Explanation / Answer
Total demand, QD = 3244 - 283P
Domestic demand, QDCND = 1244 - 83P
Export demand, QED = QD - QDCND = 2000 - 200P
Supply, QS = 1872 + 207P
(a) In equilibrium, QD = QS
3244 - 283P = 1872 + 207P
490P = 1372
P = 2.80
Q = 1872 + (207 x 2.8) = 2452
Revenue = P x Q = 2.8 x 2452 = 6866
(b)
QED decreases by 20%.
Revised QED = 0.8 x (2000 - 200P) = 1600 - 160P
Revised QD = Revised QED + QDCND = 1600 - 160P + 1244 - 83P = 2844 - 243P
Equating with QS:
2844 - 243P = 1872 + 207P
972 = 450P
P = 2.16
Q = 1872 + 207 x 2.16 = 2319
Revised revenue = 2.16 x 2319 = 5009
Decrease in revenue = 6866 - 5009 = 1857
(c)
P = 2.80
Revised QD at this price = 2844 - 243P = 2844 - (243 x 2.8) = 2164
QS at this price = 1872 + 207P = 1872 + (207 x 2.8) = 2452
Government has to buy (2452 - 2164) = 288
This will cost (288 x 2.8) = 806
NOTE: All figues are rounded off to nearest dollar.
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