Question

4. Analysis of international trade. Without trade, PD = $3000, Q = 400. In world markets, Pw = $1200. Y-intercept of Demand curve is $6000. no A linu sit Plasma TVs $3000 $1200 200 400 600 a) Under free trade, how many TVs will the country import or export? b) Calculate CS, PS, and total surplus without trade, and with trade.

Answer 1

a ) Ans: Under free trade , the country will import 400 TVs.

Explanation:

Under free trade , domestic quantity demanded is 600 TVs and domestic quantity supplied is 200 TVs. It creates shortage in the domestic market.So the country will import the shortage amount ( 600 - 200 = 400 TVs).

b ) Ans:

Without trade , CS = $600000 , PS = $600000 , Total surplus = $1200000

With trade , CS = $1440000  , PS = $120000 , Total surplus = $1560000

Explanation:

Without trade , CS = 1/2 { ( $6000 - $3000 ) * 400 } = 1/2 ( $3000 * 400 ) = 1/2 * 1200000 = $600000

PS = 1/2 ($3000 * 400 } = 1/2 ( $3000 * 400 ) = 1/2 * 1200000 = $600000

Total surplus = CS + PS = $600000 + $600000 = $1200000

With trade , CS = 1/2 { ( $6000 - $1200 ) * 600 } = 1/2 ( $4800 * 600 ) = 1/2 * 2880000 = $1440000

PS = 1/2 ( $1200 * 200 } =1/2 * 240000 = $120000

Total surplus = CS + PS = $1440000 + $120000 = $1560000