1. Welfare effects of free trade in an exporting country Consider the New Zealan
ID: 2440239 • Letter: 1
Question
1. Welfare effects of free trade in an exporting country Consider the New Zealand market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in New Zealand. Suppose New Zealand's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in New Zealand in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium. 1100Domestic Demand Domestic Supply 1000 Equilibrium without Trade 900 800 700 Consumer Surplus 600 ?500 Producer Surplus 400 300 200 0 35 0105 140 75 210 245 280 315 350 QUANTITY (Tons of lemons) Based on the previous graph, total surplus in the absence of international trade is SExplanation / Answer
As given in the question we need to find the total surplus in absence of international trade .
As we know that in absence of international trade , the market is in force and it according to demand and supply adjusts to have an equilibrium price and quantity .
Total surplus is given by Consumer surplus + producer surplus
Consumer surplus : the area enclosed by the price line and the demand curve which is a triangle
Area of triangle = 1/2 *b* h = 1/2*(175 )*(1100-600)
= 1/2 *175* 500= 43750 sq units is the consumer surplus
producer surplus : the area of traingle enclosed by the price line and the supply curve
Area of triangle = 1/2 *b* h = 1/2* 175 *(600-100)
= 1/2 *175 * 500 = 43750 sq units is the producer surplus
so total surplus is 43750 + 43750 = $87500
When the price of lemons is $ 800 then demand of lemons in the New Zealand which is the domestic country reduces . So the demand would be 105 tons of lemon in New Zealand
The supply would be more since at higher prices suppliers tend to supply more
So 245 tons of lemon will be supplied by domestic suppliers
The exports of lemon would be Supplied by domestic supplier - demanded domestically
= 245 tons - 105 tons = 140 tons of lemon
Now we will find the consumer and producer surplus with the free trade
The same formula will be applied as when it was without trade
consumer surplus = the area enclosed by the world price line and the domestic demand curve which is a triangle
Area of triangle = 1/2 *b* h =1/2* 105*(1100-800)
= 1/2 *105 *300
= 15750 sq units
Producer surplus = the area of traingle enclosed by the world price line and the domestic supply curve
Area of triangle = 1/2 *b* h = 1/2* 245*(800-100)
= 85750 sq units
When New Zealand allows free trade the country's consumer surplus decreases by 43750-15750 = $ 28000 and the producer surplus increases by $85750-$43750 = $ 42000. So the net effect of international trade on New Zealand 's total surplus is a gain of $42000-$28000= $14000
Without free trade With free trade consumer surplus $43750 $15750 producer surplus $43750 $85750Related Questions
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