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The market for rice in an East Asian country has demand and supply given by QD = 28 - 4P and QS = -12 + 6P, where quantities denote millions of bushels per day.
a. If the domestic market is perfectly competitive, find the equilibrium price and quantity of rice. Compute the triangular areas of consumer surplus and producer surplus.
b. Now suppose that there are no trade barriers and the world price of rice is $3. Confirm that the country will import rice. Find QD, QS, and the level of imports, QD - QS. Show that the country is better off than in part (a), by again computing consumer surplus and producer surplus.
c. The government authority believes strongly in free trade but feels political pressure to help domestic rice growers. Accordingly, it decides to provide a $1 per bushel subsidy to domestic growers. Show that this subsidy induces the same domestic output as in part (a). Including the cost of the subsidy, is the country better off now than in part (b)? Explain.
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