Question

INTERNATIONAL TRADE WORKSHEET 4 Below, you are provided with the demand and supply curves for pizzas. You will use this information to identify whether the country imports or exports pizza. You will also determine whether producers and/or consumers win by engaging in international trade. $28 Price $24 $20 Supply $16 $12 Demand $8 $4 1,000 2,000 3,000 4.000 5,000 6,000 Quantity of Pizzas Part 1: Suppose that the country depicted above does not trade pizzas. What is the equilibrium price of a pizza? How many pizzas are bought and sold? Part 2: Suppose that the country depicted above does not trade pizzas. Calculate the amount of consumer surplus that results in this market. Part 3: Suppose that the country depicted above does not trade pizzas. Calculate the amount of producer surplus that results in this market.

Answer 1

1.Ans: The equilibrium price of pizza is $14 and 3000 pizzas are bought and sold.

Explanation:

At equilibrium price , Qd = Qs

2.Ans: Consumer surplus =$9000

Explanation:

Consumer surplus = 1/2 ( height * base)

= 1/2 {( $20 - $14 ) * 3000}

= 1/2 ( $6 * 3000) = 1/2 * $18000 = $9000

3.Ans: Producer surplus =$9000

Explanation:

Consumer surplus = 1/2 ( height * base)

= 1/2 {( $14- $8 ) * 3000}

= 1/2 ( $6 * 3000) = 1/2 * $18000 = $9000

4.Ans:

The country imports pizzas.

The country imports 2000 pizzas.

Explanation:

At the world price of $12 , domestic demand is greater than the domestic supply. It leads a shortage of pizzas in the domestic market. So the country imports pizzas.

At the world price of $12 ;

Total quantity demanded = 4000 pizzas

Total domestic supplied = 2000 pizzas

Import quantity = 4000 -  2000 =  2000 pizzas

5.Ans: Consumer surplus = $16000

Explanation:

After trade , consumer surplus = 1/2 {( $20 - $12 ) * 4000} = 1/2 ( $8 * 4000) = 1/2 * $32000 = $16000

6.Ans: Producer surplus = $16000

Explanation:

After trade , producer surplus = 1/2 {( $12 - $8 ) * 2000} = 1/2 ( $4 * 2000) = 1/2 * $8000 = $4000

7.Ans: Total surplus increases by $2000 when this country trades pizza.

Explanation:

Before trade , total surplus = $9000 + $9000 = $18000

Before trade , total surplus = $16000 + $4000 = $20000

So gain in total surplus = $20000 - $18000 = $2000