Question

Italy’s demand and supply for cheese is given in the table below:

Price (US $)	Qty. Demand	Qty. Supplied
15	4000	1000
20	3500	2000
25	3000	3000
30	2500	4000

1.Draw the demand and supply diagram. What is the domestic equilibrium price and quantity?

2.If the world price of cheese is $20, (add this to the diagram) would Italy become an exporting or importing country for cheese?

3.Who gains and who loses from trade? Show the gains from trade on the diagram.

Answer 1

1)

+ 1000 2000 3000 4000 5000

Price = 25

Quantity = 3000

2) When the world price = 20, the country will become an importer as the price is below the domestic price

QD Qs 1000 2000 3000 4000 5000

3) Domestic producers loses as price decreases whereas the domestic consumers gains

Gains from trade = Area D

QD Qs 1000 2000 3000 4000 5000