Question

To answer the next question, use the following graph showing the domestic demand and supply curves for a specific standardized product in a particular nation.

Supply $1.60 Price 00 Demand 290 130 200 Quantity

If the world price for this product is $0.50, this nation will experience a domestic

Multiple Choice

• shortage of 160 units, which it will meet with 160 units of imports.

• shortage of 160 units, which will increase the domestic price to $1.60.

• surplus of 160 units, which it will export.

• surplus of 160 units, which will reduce the world price to $1.00.

Use the following figure showing the domestic demand and supply curves for product B in a hypothetical economy to answer the next question.

After trade, at a world price of P_{w ,} consumer surplus equals area(s)

Multiple Choice

• A + B + C + D.

• A + B + C.

• A + D.

• A.

The productivity table given below shows how many bushels of either wheat or rice can be produced in India and US with 1 unit of input.

Country	Wheat (bushels)	Rice (bushels)
India	10	10
Canada	40	20

To achieve gains from specialization and trade

Multiple Choice

• India should export rice to US and import American wheat.

• India should export wheat to US and import American rice.

• US should produce both wheat and rice and not trade with India.

• India cannot offer any benefits to US from trading with her.

Answer 1

1. Ans: shortage of 160 units, which it will meet with 160 units of imports.

Explanation:

At a price of $0.50, domestic demand is 290 and domestic supply is 130. So, there is a shortage of 160 which the country can import.

2. Ans: A

Explanation:

After trade, at a world price of P_{w ,} consumer surplus equals area A.

3. Ans: India should export rice to US and import American wheat.

Explanation:

India's opportunity cost of producing 1 bushel of wheat = 10 / 10 = 1 bushel of rice and the opportunity cost of producing 1 bushel of rice = 10 / 10 = 1 bushel of wheat.

Canada's opportunity cost of producing 1 bushel of wheat = 20 / 40 = 0.5 bushel of rice and the opportunity cost of producing 1 bushel of rice = 40 / 20 = 2 bushel of wheat.

As we know, a country has comparative advantage in production of the goods which it can produce at lower opportunity cost than other country.

From the above calculation we found that, India has comparative advantage in production of Rice and Canada has comparative advantage in production of Wheat.

Thus, India should export rice to US and import American wheat.