Wintertown has a linear domestic supply and a linear demand for snow boots. The

Question

Wintertown has a linear domestic supply and a linear demand for snow boots. The world price for boots I $5. At first Wintertown is a closed economy with no trade, and the market price and quantity of boots exchanged in the domestic market are $10 per pair and 30 pairs of boots. Then, Wintertown starts trading with the world and because of trade its domestically supplied quantity decreases by 15 pairs of boots and imports are 25 pairs of boots. What is the domestic demand and consumer surplus before trade begins? Government puts a traffic of $2 per snow boots on snow boots import. What is the deadweight loss?

Explanation / Answer

Answer:

4. The domestic demand and consumer surplus before trade begins?

(d) P = (-1/3)Q + 20; CS = 225

At first Wintertown is a closed economy with no trade and the domestic market:

The price is: $10, and

The quantity is: 30pairs

After world trade the domestic market’s quantity of supply decreased to 15 pairs and imports 25 pairs of boots.

Before trade, the market price is: $10 and Q = 30. We can simply prove this with substituting the P = 10 into the domestic demand function.

That is: 10 = (-1/3)Q + 20

                Q/3 = 10

                Q = 30

The world price of the boot is: $5 before the trade. Therefore, the consumer surplus is: $150, because the domestic market demanded $300. That is 300 – 150 = $150

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