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)
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.
Trade effect on consumer surplus is assessed.
Free Trade / Surplus
2. The world price of wine is below the price that would prevail in the United States in the absence of trade.
a. Assuming that American imports of wine are a small part of total world wine production, draw a graph for the U.S. market for wine under free trade. Identify consumer surplus, producer surplus, and total surplus in an appropriate table.
b. Now suppose that an unusual shift of the Gulf Stream leads to an unseasonably cold summer in Europe, destroying much of the grape harvest there. What effect does this shock have on the world price of wine? Using your graph and table from part (a), show the effect on consumer surplus, producer surplus, and total surplus in the United States. Who are the winners and losers? Is the United States as a whole better or worse off?View Full Posting Details