Based on the previous graph, total surplus in the absence of international trade

Question

Based on the previous graph, total surplus in the absence of international trade is S million. The following graph shows the same domestic demand and supply curves for lemons in Bolivia. Suppose that the international trade policy to allow the free trade of lemons. The horizontal black line (Pw) represents the world price of Bolivian government changes its the free trade of lemons. The horizontal black line (Pw) represents the world price of lemons at $800 per ton. that Bolivia's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. Use the green point (triangle symbol) to shade consumer surplus, and then use the purple point (diamond symbol) to shade producer surplus. 1070 Domestic Demand 980 890 800 710 620 530 440 350 260 Domestic Supply Consumer Surplus Producer Surplus

Explanation / Answer

At this prices, 60 tons of lemons will be demanded in Bolivia and 140 tons will be supplied by domestic suppliers. Therefore Bolivia will export 80 tons of lemons.

When Bolivia allows free trade the conutry's consumer surplus decreases by 14,400 millions and producer surplus increases by 25,000 million. So the net effect of international trade in Bolivia's total trade surplus is a increase of 10,600 million.

Without free trade With free trade Consumer Surplus 22500 8100 Producer Surplus 31000 56000

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