Question:

Swiss Export Cheese Market: Switzerland is famous for its good quality cheese of various kinds. Until recently, the government was tightly regulating both its domestic and export cheese markets, as described below:

"It is striking to discover that Switzerland, home not just of serious cheese, but also of one of the world’s most protected farm sectors...is taking a big bet that the future of Gruyére and Emmental is best secured by embracing international competition. Recently we saw the near-total liberalization of Swiss-EU cheese trade. This ended years of import barriers that doubled the cost of some EU cheese on Swiss shelves, as well as export subsidies that dumped half-priced Emmental in places like Italy."

To gain further insights into this recent event, consider the following hypothetical example of the export Emmental cheese market. Suppose that the annual demand for and supply of export Emmental cheese are given by the following functions:

1a) Mathematically derive the market equilibrium price (P*) and quantity (Q*). Make sure to show the process of derivation. (2 marks)

1b) Draw the demand and supply functions in the graph space below, and clearly indicate the equilibrium. (6 marks)

In Switzerland, Emmental, as any other cheese for export, was in the past first bought up by a government agency at a high price. Let’s suppose that in this example, the government buys Emmental cheese from the farmers at a price of 80 euros, as if it is the price floor offered to the Swiss Emmental cheese farmers.

1c) If government buys up all the Emmental cheese that the farmers are willing and able to sell at the price of 80 Euros, how many kilogrammes of Emmental will be bought by the government? (2 marks) ***

1d) If the government then "dumped half-priced Emmental" at the price of 40 euros, can the government sell all the cheese that they bought (i.e., the amount you derived for 1c) from the Swiss farmers? (2 marks) ***

1e) What is the net cost for the government to support such an export subsidy programme? (In other words, what is the difference between how much it costs the government to buy the amount of the cheese at 80 euros, and the revenue the government raises from selling the cheese at 40 euros?) (4 marks) ***

One of the reasons behind Switzerland’s liberalisation of the cheese market was the expected increase in the demand for their export cheese (growing Indian middle class and Chinese). So suppose that the above mentioned government price support programme is now removed (i.e., no market intervention by the government).

But suppose also that the quantity demanded increases by 25,000kg at every price.

1f) Will the Emmental cheese farmers be as well off as they were under the government’s price support programme? Explain, by referring to the above graph. (4 marks) ***

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