Illustrate the effect of a decrease in the quantity

Reference no: EM132197997

Question: Suppose that New Zealand is the sole exporter of milk powder in the world, and China is the largest importer (and large enough that its actions affect the price). Using a 3-

panel ES/ED trade diagram, answer the following. Be sure to label prices, quantities and demand/supply schedules.

(a) Illustrate the effect of a 10% decrease in the quantity demanded by China for milk powder. Show how this will affect world prices, New Zealand exports and Chinese domestic production, assuming Chinese and New Zealand milk powders are very close substitutes. Assume transport costs are negligible.

(b) Show how this result will change if China operated its domestic milk industry using farm-level production quotas that were fixed at the level prior to the decrease in Chinese demand (i.e., Chinese production stayed fixed at the original level).

Reference no: EM132197997

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