Question

1) Suppose the demand and supply curves for the United States and the European Union are given by: Demand (Qa) Supply (s) U.S.A. 250 - 2.5P 25 + 1.25P E.U. 125 - 1.75P 50 + 2P Where P is the relative price of soybeans andQd and Qs refer to the quantity of soybeans demanded and supplied. a. Calculate the equilibrium prices and quantities in autarky. Determine the equilibrium prices and quantities under free trade. b. Plot the domestic and world markets from part b. C. On your graph, show the gains from trade. d. Compute the welfare effects from moving from autarky to free trade.

Answer 1

1. From the provided informations we first calculate the home oo (USA) and foreign CEU) autarkix Prices @ Thus, for the USA, Bs=Qd = 250-2.5p = 25+1:25p.... @ i p*= 60 Depot canadie and 889 250 - 25*60 = 100. and, for EU, ax = 8 t =D 125-1.75 p = 50+2P .... :p*a = 120 and &*a = 50+2x20=90. Thus, the foreign (EU) has comperative advantage in producing Soyabines. Thus, EU exports and USA imports. Now, Import se demand for USA = M = 8-as = 225-3,75p ... ① Export supply for EU = x= 8*8 * = - 75+3.750 ... ① Thus, the free trade will M=X => 225 -3.75 P= 75 +3.75P PT = 40 and 8 = -75 +3.7.5x40=75. USA Thus, a's autankire pa= 60 and 8" = m 100. EU'S " pax=20 and 8 = 90 Free trade PT = 40 and 8T = 75. under a* On 100 CS 70 -- E A pl 40 P - 60 - - - - - 207 --. posisi 250 PS / 125 20 0 2575 100 150 o do* 55m 9081300 fig a. USA figb. EU PT 40 ps PSG REXIB 225 75 ? @ the shaded area USA. The shaded for EU Å denotes the gains area 't denotes the figc. Wored. from trade for gains from the [го.) 1 SOA

1 ② . Thus, & Gears of trade for USA = Įx (150-75] x20= 750. I This is the change in welfare from autorky to free trade. .l.e., AW = 750. And, Grains from trade for EU = b ( 130-55)& X 20 = 750. This is the change in welfare from autark to free trade. it. AW*=750: Here the calculations are done in the areas are by putting the wored prożce in the respective demand formetions of USA and EU and the points we got. I say (150,40). ( 75,40) (130,40), (55,40) are shown in the diagrams,