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Calculating the benefits of international trade

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1.
A new product that is produced and consumed only in the USA and France is about to be launched. In the USA, the following demand and supply curves are appropriate:

QDU = 100 - 2PU
QSU = 5 + 2.6PU

Also suppose that a French producer is simultaneously ready to enter the USA and French markets with the following demand and supply functions (stated in USA prices):

QDF = 120 - 6.4PU
QSF = 5 + 3.2PU

a) What would be the pre-trade values of price and quantity in the USA? In France(in dollar terms)?
b) If the countries decided to trade, how would you find world demand and world supply?
c) In the absence of governmental intervention, what would be the amount produced in the USA? In France?
d) What is the amount consumed in both countries after trade commences? What would be the price (assume zero transportation costs)?
e) Who is better off and who is worse off?

2. Suppose that the USA imposes a quota of 3 million units per month from France.
a) What would be the effect of this policy on the price in the USA?
b) Who is better off and who is worse off?

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Solution Preview

1.
a)
In the US:
Let QDU = QSU
100 - 2PU = 5 + 2.6PU
95 = 4.6PU
PU = 20.65
QU = 100 - 2PU = 100 - 2(20.65) = 58.70

In the US, the price will be 20.65 and the quantity will be 58.70.

In France:
Let QDF = QSF
120 - 6.4PU = 5 + 3.2PU
115 = 9.6PU
PU = 11.98
QF = 120 - 6.4PU = 120 - 6.4(11.98) = 43.33

In France, the price will be 11.98 and the quantity will be 43.33.

b)
Find world demand and supply by adding each country's demand ...

Solution Summary

Given the supply and demand functions for a particular product in the United States and France, this solution calculates the quantities that will be produced and consumed in each country with and without trade. It then calculates the effects of the US imposing a quota on imports from France.

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