4) Welfare Analysis: Trade (7 points)

Finally, let's suppose that this is a tiny country that opens up to trade, and the world price of coffee is $14 per lb. Assume that this country is a small enough part of the world market that its decision to trade does not impact the world price.

a. What is the domestic equilibrium price and quantity of coffee under autarky?

P* = $

Q*=

Ibs

b.

Draw the world price on the graph and clearly label the domestic quantities supplied and demanded with trade.

Quantity supplied:

_ Ibs

Quantity demanded:

bs

c. Will this country be a net-exporter or net-importer of coffee, and how many lbs of coffee will be imported or exported?

Suppose the market for oranges in a small country is closed to international trade. The domestic price is $3 per lb, at which 10,000 lbs are bought and sold in the country, while the world price is $4 per lb. If the country opens up to free trade with the world, the domestic quantity demanded at the world price will be 8,000 lbs, and the domestic quantity supplied at the world price will be 12,000 lbs. 

A. Which of the following statements is true?

a. The country will become an importer of oranges because it has a comparative advantage in the production of oranges

b. The country will become an exporter of oranges because it has a comparative advantage in the production of oranges

c. The country will become an importer of oranges because the world has a comparative advantage in the production of oranges

d. The country will become an exporter of oranges because the world has a comparative advantage in the production of oranges

B. At what price (per lb.) will oranges be bought and sold in the country after opening up to trade?

a. $3

b. $4

c. $3.5

C. After opening up to trade, the level of exports/imports for the country will be:

a. 8,000 lbs.

b. 12,000 lbs.

c. 10,000 lbs.

d. 4,000 lbs.

D. How much (in $) is the net gain from trade for this country in opening up to free trade?

The demand for computers in a certain country is given by D = 20000 – 300P; where P is the price of a computer. Supply by domestic computers producers is S = 10000 + 100P.

(a) Assuming that the economy is closed, find the equilibrium price and production quantity of computers.

(b) The economy opens to trade. The world price of a computer is $20. Find the domestic quantities demanded and supplied and the quantity of imports or exports. Who will support the opening of the computer market to trade and who will oppose it?

(c) The government imposes a tariff of $1 per computer. Find the effects on domestic quantities demanded and supplied and on the quantity of imports or exports. Also find the tariff revenue collected by government. Who will support the imposition of tariff and who will oppose it?

(d) Suppose the government imposes an import quota of 1600 computers. Find the equilibrium price in the domestic computer market, as well as the quantities produced by domestic firms and purchased by domestic consumers.

The equation for the demand curve is D = 100 - P. That means that the intercept on the price axis is 100, and the intercept on the quantity axis is also 100. The slope of the demand curve is -1. The equation for the supply curve is S = 9*P. That means that the supply curve begins at the origin, and increases with a slope of 9. For example, if the price is $1, the quantity supplied is 9. If the price is $20, the quantity supplied is 180. If you draw these curves you will notice that the intersection of supply and demand occurs at a price of $10 and a quantity of 90. That is the market equilibrium. We will call it the autarkic equilibrium in this market.

A. What is the consumer surplus?

B. What is the producer surplus

C. Using the same information as in problems A and B, now also assume that the country can trade this product at a world price of $20. Will the country be an exporter or an importer of the product?

D. Continuing with the information in the previous problem, at a price of $20, what is the quantity demanded? Plug the price into the demand formula in problem A

E. What is the new consumer surplus when the country begins trading at a price of $20?

F. What is the new producer surplus when the country begins trading at a price of $20?

G. What is the dollar value of the gains from trade?