For a small country called Boxland, the equation of the Domestic demand curve fo

Question

For a small country called Boxland, the equation of the Domestic demand curve for cardboard is QD=200-2p, where QD represents the domestic quantity of cardboard demanded, in tons, and P represents the price of a tin of cardboard. For Boxland, the equation of the domestic supply curve for cardboard is QS=-60+3P, where QS represents the domestic quantity of cardboard supplied, in tons, and P again represents the price of a ton of cardboard. Suppose the world price of cardboard is $60. The Boxlands gains from international trade in cardboard amount to $120 $145 $160 $320

Explanation / Answer

At equilibrium,

Demand = Supply

QD = QS

200 – 2P = –60 + 3P

5P = 260

P = 260 / 5 = $52

Now,

Boxland produces and supplies at the world price of $60 even in the domestic market

Hence the new demand and supply in the domestic market will be

QD = 200 – 2P = 200 – 120 = 80 tons

QS = -60 + 3P = 180 – 60 = 120 tons

That means Boxland has a surplus of 40 tons which it can export or trade internationally

Gains from trade = 60 – 52 = $8 per ton

Total gains = 40 x 8 = $320.

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