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.
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
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,
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
of Domestic Supply
C E F
I Domestic Demand
Quantity of cloths
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.
$16 World Price
1 Quantity of T-shirts
3 4 (in Millions)
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
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
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
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