Question

Consider the Bolivian market for lemons.

The following graph shows the domestic demand and domestic supply curves for lemons in Bolivia. Suppose Bolivia'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 Bolivia 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.

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

 The following graph shows the same domestic demand and supply curves for lemons in Bolivia. Suppose that the Bolivian government changes its international trade policy to allow free trade in lemons. The horizontal black line ( Pw) represents the world price of lemons at $800 per ton. Assume 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 triangle (triangle symbol) to shade consumer surplus, and then use the purple triangle (diamond symbol) to shade producer surplus.

 When Bolivia allows free trade of lemons, the price of a ton of lemons in Bolivia will be $800. At this price, _______  tons of lemons will be demanded in Bolivia, and _______  tons will be supplied by domestic suppliers. Therefore, Bolivia will export _______  tons of lemons.

 Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.

 When Bolivia allows free trade, the country's consumer surplus _______  by _______, and producer surplus _______  by _______ . So, the net effect of international trade on Bolivia's total surplus is a _______  of _______ .

Answer 1