Question
I know that the eq. price is 172 and quantity is 172 for France. I know that the rest of the world has a comparative advantage. I need help with Part 2, questions: b, c, and 3. Thanks!
BTTUx AParagraph Stylas 4. Refer to igure above. Which area represents the Increase in consumer surplus when the price falls from Ps to Ph? a. ABD b. ACF c. DEF d. BCFD Refer to figure above. When the price falls from P to Ps, which area represents the increase in consumer surplus to existing buyers? a. ABD b. ACF 5. BCED d. DEF Part Il: Answer the short answer question in a clear, concise, yet comprehensive manner. Graphs and calculations are mandatory whenever appropriate. The domestic demand and supply conditions for oil in France are given as follows: P 12+400 where quantity Q is in billions of barrels per year and price P is in doilars per barrel. 1] What are the equilibrium price and quantity in autarky? With free trade and an international price of $100 per barrel, a. 2) Does France or the rest of the world have comparative advantage? b. What are the domestic production and domestic consumption respectively? c. Would France import or export and by how many? 3) Moving from autarky to free trade, what are the effects of trade on the economic weil being of consumers, producers, and the nation? Please quantify your answers. Create a graph and refer to your graph in your answer. of 2 426 Words Ep h 110 18478 18
0 0
Add a comment Improve this question Transcribed image text
Answer #1

Solution:

Given Oil's inverse demand function in France: P = 364 - 48*Q and inverse supply function as: P = 12 + 40*Q

1) Finding equilibrium price and quantity (in autarky):

Equating the two equations above (since at equilibrium same amount will be supplied as demanded) and the price charged will also be equal. So,

364 - 48*Q = 12 + 40*Q

364 - 12 = 40*Q + 48*Q

352 = 88*Q

Q = 352/88 = 4.

And equilibrium price, P = 364 - 48*4 = $172

So, equilibrium quantity is 4 billions of barrels per year and equilibrium price is $172 per barrel.

2) Given that the international price of a barrel of oil = $100

a) Since, the price per barrel of oil is lower for rest of the world as compared to France, we can claim that the rest of the world have comparative advantage.

b) Given inverse demand function: P = 364 - 48*Q, so demand function becomes: Qd = (364/48) - (1/48)*P

And with inverse supply function: P = 12 + 40*Q, supply function becomes: Qs = (1/40)*P - (12/40)

As the world price is lower than that which prevails in France, under free trade, consumers will wish to import the barrels of oil. In such case, producers in France will not be able to sell out anything, suffering a huge loss. Thus, in order to compete with the world in oil market, producers in France will reduce the price of oil to world price, that is, $100 per barrel.

So, at price of $100 per barrel of oil, Quantity demanded domestically, Qd = (364/48) - (1/48)*100 = 5.5

While the quantity supplied domestically, Qs = (1/40)*100 - (12/40) = 2.2

c) Since, the domestic quantity demanded (consumption) of barrels of oil is higher than the domestic quantity supplied, this clearly means that France is an importer of oil (as the excess demand is fulfilled by imports).

Imports = Domestic consumption - domestic production

Imports = 5.5 - 2.2 = 3.3 billions of barrels of oil

Thus, France will produce 2.2 billions of barrels of oil domestically, and import 3.3 billions of barrels of oil, to meet the domestic demand of 5.5 billions of barrels of oil.

3) Keep referring the graph below:

Price, P 400 s per Domestic supply curve barrel) AB64 360 320 280 240 200 C 172 160 120 D 100 orld price $100 80 40 tic pema Imports (5.5-2.2-)3 3 curve .2 5.5 0 1 4 6 10 Quantity, Q (Billions of barrels of oil)

Under autarky:

Consumer surplus (area of triangle AEC) = (1/2)*(equilibrium qty)*(maximum willingness to pay - equilibrium price)

CSa = (1/2)*4*(364 - 172) = $384 (grey triangle in graph)

Producer surplus (area of triangle CEB) = (1/2)*(equilibrium qty)*(equilibrium price - minimum willingness to receive)

PSa = (1/2)*4*(172 - 12) = $320 ((yellow+blue) triangle in graph)

So, national surplus (i.e. total welfare) = CSa + PSa = 384 + 320 = $704

Under free trade:

Consumer surplus (area of triangle AGD) = (1/2)*(quantity demanded)*(maximum willingness to pay - price paid)

CSt = (1/2)*5.5*(364 - 100) = $726 ((grey+yellow+green) triangle in graph)

Producer surplus (area of triangle BDF) = (1/2)*(quantity supplied)*(price received - minimum willingness to receive)

PSt = (1/2)*2.2*(100 - 12) = $96.8 (blue triangle in graph)

So, national surplus (i.e. total welfare) = CSt + PSt = 726 + 96.8 = $822.8

We can see that by moving from autarky to free trade, consumers have gained (their surplus increased from 384 to 726, as now they have to pay lower price for each barrel of oil; more oil is consumed at a lower price), producers have lost (their surplus has decreased from 320 to 96.8, as now with global openness due to high domestic price, demand for their oil has decreased as consumers can buy same barrel at lower price globally, so even domestic sellers are forced to decrease their price; lower oil is supplied at lower price). Overall the nation has gained (as gain in consumer surplus is higher than loss in producer surplus).

So, well being of consumers has increased by (726 - 384=) $342, well being of sellers has decreased by (320 - 96.8=) $223.2, and nation's well being has increased by (822.8-704= or 342-223.2=) $118.8 (green triangle).

Add a comment
Know the answer?
Add Answer to:
I know that the eq. price is 172 and quantity is 172 for France. I know...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT