Question

Exhibit 33-2

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Refer to Exhibit 33-2. The U.S. demand and supply for a good are shown. Under a policy of free trade, the world price is P_W. At this price, what quantity of this good do U.S. consumers buy from U.S. producers and what quantity do they import from foreign producers?

A. Q2 from U.S. producers and (Q3 - Q1) from foreign producers

B. (Q3 - Q1) from U.S. producers and Q1 from foreign producers

C. Q3 from U.S. producers and nothing from foreign producers

D. Q1 from U.S. producers and (Q3 - Q1) from foreign producers

Answer 1

Answer : The answer is option D.

At Pw price level the quantity supplied by U.S. producers is Q1. So, in free trade U.S. consumers will purchase Q1 quantity of the good from U.S. producers. But at Pw price level the quantity demanded is Q3. So, at Pw price level the market faces excess demand of (Q3 - Q1). Hence U.S. consumers will import (Q3 - Q1) quantity of the good from foreign producers. Therefore, option D is correct.