The farmers in Country A harvest and sell 150 tons of rice at the price of $80 per ton. Of the total produced, 30 tons are exported. If the government bans all exports of rice, the domestic price of rice would drop to $60. But the production and sales would also drop to 120 tons. How much loss would the domestic farmers incur due to the export ban? Use a graph to illustrate your answer.
What will be an ideal response?
POSSIBLE RESPONSE: This problem is illustrated in the following graph.
The initial situation defines a producer surplus measured by the area (w + v). The ban on the exports of rice lowers the price to $60, and the new producer surplus is given by area w. The loss is area v, which can be calculated as (v + x) - x = (80 - 60) × 150 - (150 - 120) × (80 - 60)/2 = 3,000 - 300 = $2,700.
So, due to the export ban, the domestic farmers would suffer an amount of loss equivalent to $2,700.
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