Question

 5. 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 the 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 point (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium.

 Based on the previous graph, total surplus in the absence of international trade is _______  million.

 The following graph shows the same domestic demand and supply curves for lemons in New Zealand. Suppose that the New Zealand government changes its international trade policy to allow the free trade of lemons. The horizontal black line (Pw) represents the world price of lemons at $800 per ton. Assume that New Zealand'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. Hint: You may not need to use all the points (triangle and diamond symbols) to shade the correct areas. Do not shade the same area with multiple points.

 Hint: You may not need to use all the points (triangle and diamond symbols) to shade the correct areas. Do not shade the same area with multiple points.

Answer 1

Graph for the domestic market for lemons:

In the above image, the equilibrium price and quantity will be found where the dotted lines meet. That is,

Equilibrium price = $620
Equilibrium quantity = 100 thousand tons

Graph for the international market for lemons:

In this case, the quantity demanded domestically will go down to 60 thousand tons because the price to be paid by domestic consumers has increased to $800. However, the total quantity supplied by the producer is 140 thousand tons and to the international market is 80 thousand tons.

I hope this helps. All the best!