Textbook Notes (363,074)
Canada (158,173)
Economics (727)
ECON 1B03 (302)
Chapter 9

Micro Chapter 9 Solution.doc

9 Pages
Unlock Document

McMaster University
Hannah Holmes

APPLICATION: INTERNATIONAL 9 TRADE Problems and Applications 1. a. In Figure 3, with no international trade the equil1brium price is P and the equilibrium quantity i1 Q . Consumer surplus is area A and producer surplus is area B + C, so total surplus is A + B + C. Figure 3 b. When the Canadian apple market is opened to trade, the new equiliWrium price is P , the quantity consumed Ds Q , the quantity produced domeStically is Q , and the quantity imported iD Q S Q . Consumer surplus increases from A to A + B + D + E. Producer surplus decreases from B + C to C. Total surplus changes from A + B + C to A + B + C + D + E, an increase of D + E. 2. a. Figure 4 illustrates the U.S. market for wine, where the world1price of wine is P . The following table illustrates the results under1the heading "P ." P1 P2 CHANGE Consumer Surplus A+B+D+E A+D –(B+E) Producer Surplus C B+C +B Total Surplus A+B+C+D+E A+B+C+D –E 167 168 ✦ Chapter 9/Application: International Trade Figure 4 b. The shift in the Gulf Stream destroys some of the grape harvest, raising the world price of wine to P . The table shows the effects on consumer, producer, and total surplus, 2 under the heading "P "2and the change in the surplus measures under the heading "CHANGE." Consumers lose, producers win, and Canada as a whole is worse off. 3. Figure 5 shows the market for clothes in Canada. a. The change in the quantity of imports is the difference H−I. b. The loss to Canadian consumers is equal to C+D+E+F. c. The gain to Canadian manufacturers is C. d. Government revenue is E. e. The deadweight loss is D+F. The three pieces of the loss to consumers are: C = transfer to domestic producers, E = transfer to the government, and D+F = the deadweight loss. Chapter 9/Application: International Tra✦e169 Price of Domestic Supply cloths A B C E F D G I Domestic Demand Quantity of cloths H Figure 5 4. a. The world milk price must be below the Canadian no-trade price, because diary farmers oppose free trade. They oppose it because they know that when trade is allowed, the Canadian price of milk will decline to the world price, and their producer surplus will fall. The world lumber price must be above the Canadian no-trade price, since lumber producers support free trade. They know that when trade is allowed, the Canadian price of lumber will rise to the world price, and their producer surplus will rise. b. Considering both markets together, free trade makes diary farmers worse off and lumber producers better off, so it isn't clear whether producers as a whole gain or lose. Similarly, consumers of milk gain (since the price of milk will decline) and consumers of lumber lose (since the price of lumber will rise), so consumers as a whole may either gain or lose. However, we know that the total gains from trade are positive, so Canada as a whole is better off. 5. The tax on wine from Ontario is just like a tariff imposed by one country on imports from British Columbia. Ontario producers would be better off and Ontario consumers would be worse off. The higher price of wine in Ontario means producers would produce more wine, so they would hire more workers. Tax revenue would go to the government of Ontario. So both claims are true, but it is a bad policy because the losses to Ontario consumers exceed the gains to producers. 170 ✦ Chapter 9/Application: International Trade 6. a. Figure 6 shows the changes in consumer, producer, and total surpluses. Price of T-shirts Domestic Supply A $20 B D $16 World Price C Domestic Demand 1 Quantity of T-shirts 3 4 (in Millions) Figure 6 b. The increase in consumer surplus (B+D) = $14 million. (An easy way to calculate the area B+D is the following: B+D=(20−16)×3+(1/2)×(20−16)×(4−3)=$14 million). The change in producer surplus is (−B) = −[(20−16)×3−(1/2)×(20−16)×(3−1)]= −$8 million and the change in total surplus (D) = 14−8=$6 million. 7. a. When a technological advance lowers the world price of televisions, the effect on Canada, an importer of televisions, is shown in Figure 7. Initially the world price of televisions is1P , consumer surplus is A + B, producer surplus is C + E, total surplus is A + B + C + E, and the amount of imports is shown as “Imports 1. After the improvement in technology, the world price of televisions declines 2o P , consumer surplus increases by C + D to A + B + C + D, producer surplus declines by C to E, total surplus rises by D to A + B + C + D + E, and the amount of imports rises to “Imports2”. Chapter 9/Application: International Trade ✦ 171 Figure 7 b. The change in consumer surplus (C+D) = $30 million + $60 million = $90 million. The change in producer surplus (-C) = -$30 million. The change in total surplus (+D) = $60 million. c. If Canada has a binding tariff on television imports, the situation is shown in Figure 8. In this situation, both before and after the technological advance, the quantity of televisions D S demanded is Q q and the quantity produced domestically is Q . qhus consumer surplus and producer surplus are unaffected by the productivity improvement. However, the government would received a tariff of $60 million (600,000 units of $100 each). The deadweight loss would be area D + F ($20 million). From the standpoint of Canadian welfare, the policy would not be a good one as it generates deadweight loss. Those who support this policy would be domestic producers of television as their output is now increased from 200,000 to 400,000. Figure 8 172 ✦ Chapter 9/Application: International Trade d. This is a phenomenon called “dumping”. In support of the policy that the government should not allow imports if foreign firms are selling below their costs of production (dumping), you could argue that dumping is an attempt to drive domestic producers out of busi
More Less

Related notes for ECON 1B03

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.