Calculate domestic equilibrium price and quantity

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Reference no: EM133436047

Assignment:

The market for onions:

Let's assume the domestic demand and supply functions for onions in Australia was given by:

QD = 165 - 25P

Q_S= 50P - 30

Sketch a basic diagram of the Australian market for onions, with calculated domestic equilibrium price and quantity, and label axis intercepts.

1. Australia is a net exporter of onions in the international market. Assuming the world price of onions is currently $3.00 per kg, calculate the quantity of onions produced and consumed domestically, and amount of onions exported, and the value of export sales.

2. Refer to your diagram, and comment on what would happen in the domestic market for onions if we suddenly lost our access to international trade in this market. How does trade affect the welfare of producers and consumers, and the domestic economy overall? Is there a deadweight loss implied by allowing trade? Or not allowing trade? Substantiate your response by calculating the change in consumer, producer and total surplus if we were to ban trade in onions.

3. In early 2001 Australian onion growers experienced a bumper crop, and faced potential over-supply of onions. We would normally expect such a supply-shock to lead to a fall in prices, but this is not what happened. Supermarket prices remained stable, at around $3 per kg. How could this be, given what happened in the domestic market? What is it that keeps supermarket prices so stable? Provide an explanation by showing (qualitatively) how this supply-shock affected domestic producers, buyers and the market overall.

Reference no: EM133436047

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