Trade effect on consumer surplus
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The inverse market demand curve is P=140-Q, and the inverse supply curve is P=20+Q. Assume that the market is in the equilibrium. Now, the market is opened up for trade. The world price is $60 per unit, and the country is too small to able to influence this price. Hence, the only option the country has is to buy or sell at the world price. Given this configuration, compute the following:
1. the level of production in an open-trade equilibrium
2. the level of consumption
3. the level of trade
4. the value of additional consumption relative to the undistorted equilibrium (i.e)
(the equilibrium without trade).
5. the value of the resource savings gain, relative to the undistorted equilibrium (i.e)
without trade
6. the payment for imports
7. the producer surplus relative to the undistorted equilibrium (i.e) without trade.
8. the consumer surplus relative to the undistorted equilibrium (i.e) without trade
9. the net efficiency gain of moving from the closed market (i.e) (no trade) to the
open market described in this question.
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Solution Summary
Trade effect on consumer surplus is assessed.
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