Price W3 19. Using the diagram above, suppose the country engages in free trade

Question

Price W3 19. Using the diagram above, suppose the country engages in free trade and the world price is W2. Which of the following is correct? a. When compared to a closed economy, domestic consumers will benefit by area 8 b. When compared to a closed economy, domestic producers will benefit by area 1+2. c. When compared to a closed economy, the government will gain tariff revenue equal to area 1+2. d. When compared to a closed economy, domestic producers will lose 3+4 e. When compared to a closed economy, domestic consumers will lose area 1+2+3+4.

Explanation / Answer

Answer

Option d

The production at closed economy is where Qd=Qs

P=W3 and quantity at this point

but at the free trade the consumption increases and price decreases so the producer loses by area 3+4

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