Question

Suppose the demand for shoes is given by: Qo= 310 -2P. The supply of shoes is given by: Qs= 5P -250. Calculate the Gains from Trade (also known as Economic Surplus) that would exist in this market in a competitive equilibrium. (Do not include a $ sign in your response. Round to the nearest two decimal places if necessary.) Answer: 7350 Gains from trade are represented by the triangular area between demand and supply. They can also be thought of as the sum of Consumer Surplus and Producer Surplus. Try again

Answer 1

At equilibrium, demand is equal to supply. Calculate the equilibrium quantity and price as follows: Demand = Supply 310-2P=5P-250 -2P-5P=-250 – 310 -7P=-560 P = 560 = $80 Thus, the equilibrium price is $80. Calculate the equilibrium quantity as follows: Qp = 310-2P = 310-2(80) = 310-160 = 150 Thus, the equilibrium quantity is 150). Calculate the consumer surplus as follows:

Consumer surplus = = *(Willingness to pay – Actual price) x Equilibrium quantity =0.5*(310 – 80x150 = 0.5x(155-80)(150) = 0.5x75x150 = $5,625 Thus, the consumer surplus is $5,625). Calculate the producer surplus as follows: Producerer surplus = = x(Equilibrium price - Willingness to pay) x Equilibrium quantity =0.5(80 – 250x150 = 0.5x(80 – 25)x150 = 0.5x55x150 = $4,125 Thus, the producer surplus is $4,125).

Calculate the gains from trade as follows: Gains from trade = Consumer surplus +Producer surplus = 5,625 +4,125 = $9,750 Thus, the gains from trade i