Question

Price (dollars per shirt) 12 0 8 16 24 32 40 48 56 64 Quantity (millions of shirts per year) The above figure shows the domestic supply of and domestic demand for shirts. The world price is $36 per shirt. a. If there is no international trade, what are the equilibrium price and quantity? b. At the world price of $36 per shirt, what is the domestic consumption and domestic production? C. With the change from no international trade to trade at the world price of $36 per shirt, what is the change in consumer surplus? What is the change in producer surplus?

Answer 1

Answer:

(a) When there is no international trade, market attains equilibrium when domestic supply equals domestic demand. Thus the intersection of supply supply and demand is the equilibrium point and at this point equilibrium price, P*=$28 and equilibrium quantity, Q*=32 millions of shirt per year as shown figure.

(b) With international trade, when the price is $36, the domestic consumption is 16 millions of shirt per year and domestic production will be 48 millions of shirt per year. Here domestic consumption decreases and domestic production increases because of high price as per laws of demand and supply.

Price (dollars per shirt 0 8 16 24 32 40 4856 64 Quantity (millions of shirts per year)

(c) Consumer and Producer Surplus before trade:

CS=0.5*(44-28)*32=256

PS=0.5*(28-12)*32=256

Consumer and Producer Surplus with trade:

CS=0.5*(44-36)*16=64

PS=0.5*(36-12)*48=576

Thus change in Consumer Surplus (CS)= -192 and change in Producer Surplus (PS)=320.

Hence there is fall in CS but rise in PS.