Question

a. Draw the supply and demand curves for the US market under autarky (no trade) Note the equilibrium price and quantity b. Draw the supply and demand curves for the ROW market under autarky (no trade). Note the equilibrium price and quantity. Suppose that the two countries open to trade. Describe an arbitrage strategy that will allow you to profit from the price differential between the two markets. Be sure to explain how it will work d. Draw the import demand and export supply functions making sure to identify the P-intercepts Note the equilibrium traded quantity (imports- exports) and the equilibrium world price. How much is produced (supplied) in the ROW after trade is opened? How much is consumed (demanded)?

Answer 1

1) Equilibrium is attained when S=D. This will be the intersection of S and D curves. Equilibrium Price=12, Equilibrium quantity=8 million

Domestic Demand and Supply(US)

2) Equilibrium is attained when S=D. Equilibrium Price=12, Equilibrium quantity=8 million

Domestic Demand and Supply (ROW)

3) In this case, US equilibrium price is higher than that of ROW, it will import from ROW. ROW will be exporting.

4) US demand schedule can be derived by subtraction S from D schedule. ROW supply schedule can be derived by subtraction D from S schedule.

P	S*	D*
0	0	32
1	0	30
2	0	28
3	0	26
4	0	24
5	0	21
6	0	18
7	0	15
8	2	12
9	4	9
10	6	6
11	8	3
12	10	0
13	12	0
14	13	0
15	14	0
16	15	0

(Negative quantities in S* and D* schedules are shown as 0)

Demand and Supply in presence of International Trade

Equilibrium is attained at (quantity =6 million and price =10)

5)

Refer to the table given in question,

ROW demanded quantity (at P=10)=3 million

ROW supplied quantity (at P=10)=quantity produced=9 million