Question

Consider a single country partial equilibrium in the market for blueberries in Indiana. Assume that Indiana is a high cost producer of blueberries, so that the world price lies below the autarky price in Indiana. 2. Draw a graph of this situation, and illustrate the amount of trade that occurs, and describe that trade in terms of imports and/or exports. (10 points) a. Draw a second version of this graph. On this second graph, shade in the area that represents the change in predueer consumer surplus that would occur if people in Indiana were not allowed to trade blueberries across the state line. Is the restriction on trade harmful for consumers or beneficial for them? (10 points) b. Draw yet another version of the graph. Consider again a situation in which trade in blueberries is not allowed. Show the change in producer surplus that would occur if Indiana were not allowed to trade blueberries across state lines. Is the restriction on trade harmful for producers or beneficial for them? (10 points) c.

Answer 1

a. In the diagram below , the price of blueberries in Indiana are denoted by P_ind and that for world is denoted by P_wor. Initially, the equilibrium for Indiana is attained at point e. Here area a is the initial consumer surplus and area (b+d) is the initial producer surplus. Under free trade, Indiana will import xy amount of blueberries from the world market at lower prices. Hence, area a+b+c will be the new consumer surplus and area d is the new producer surplus.

b. Suppose, there are restrictions imposed on the trade of blueberries in the form of tariff across the state line. In this case, prices charged denoted by P_tar are higher than P_wor. At higher prices, imports fall by the area g+c+i. The area c+g+h+i represents the change (decrease) in consumer surplus. Hence, restrictions on trade are not beneficial for domestic consumers. If there are restrictions in which trade is completely forbidden, consumer surplus will return back to its initial amount i.e, area a.

c. In the same scenario as in b, domestic producers will increase their production by xu amount . Hence, producer surplus increases from area d to area d+f. Hence, domestic producers are benefited by imposition of restrictions . However, there is a net loss in welfare by the amount of area g+i. If trade is completely forbidden , producers will enjoy their initial producer surplus of area b+f+d.