Reference no: EM133313974

Government intervention and deadweight loss consider a closed economy suppose the market for corn in banana republic is competitive the domestic market demand function for corn is Q^d=45-3p and the domestic market supply function is Q^s=2p-5 both measured in billions of bushels per year. In order to help the corn industry, the government purchases 5 billion bushels corn in the market.

1. Draw a graph to show how the demand and the function shifts in response to this government purchase without calculating the numbers. Identify the area of consumer surplus, producer surplus, government expenditure and deadweight loss on the graph.

2. Calculate the new market equilibrium price and the quantity.

Now consider a small open economy the domestic supply and the demand function are the same as before. Also assume the import supply curve is infinitely plastic at a price of 6$ per bushed

1. Suppose the government imposes a tariff of 2$ per bushed without calculating the numbers, identify the area of consumer surplus, producer surplus, government tax revenue and deadweight loss in a graph.

2. Calculate the new equilibrium price and quantity. Calculate the total willingness to pay off the domestic consumer and the domestic producer surplus.