Question

Consider international trade in a world with two countries, Home and Foreign, and a single good. At Home, the demand is D = 500 - 2P and the supply is S = 200 + 4P. At Foreign the demand is D*= 600 – 2P and the supply is S* = 360 + 2P. What is the autarky price at Home? Answer: 50 What is the autarky price at Foreign? 60 Answer:

Answer 1

(Part 1)

Equating demand and supply at Home,

500 - 2P = 200 + 4P

6P = 300

P = 50

[Q = 500 - 2 x 50 = 400]

(Part 2)

Equating demand and supply at Foreign,

600 - 2P = 360 + 2P

4P = 240

P = 60

[Q = 600 - 2 x 60 = 480]

(Part 3)

From Home demand curve, when Q = 0, P = 500/2 = 250

CS at home = (1/2) x (250 - 50) x 400 = 200 x 200 = 40,000

(Part 4)

PS at home = (1/2) x (50 - 0) x 400 = 200 x 50 = 10,000

(Part 5)

From Foreign demand curve, when Q = 0, P = 600/2 = 300

CS at Foreign = (1/2) x (300 - 60) x 480 = 240 x 240 = 57,600

(Part 6)

PS at Foreign = (1/2) x (60 - 0) x 480 = 240 x 60 = 14,400

NOTE: As HOMEWORKLIB Answering Policy, 1st 4 unsolved parts are answered.