Question

Problem IV. Demand and supply curves for two large countries are given by figure 1. Answer the following questions. (38 points) 1. Consider the autarky situation. (a) Calculate CS, PS, GS, and TS for both countries. (3 povints) 2. Now, suppose countries open to trade. (a) Which country imports and which exports? (0.5 point) (1) Derive import demand for importer and export supply for exporter. You can either draw both curves with appropriate labeling and placing numbers or write equations. (points) (e) Find the new equilibrium price, trade quantity, and consumption as well as production in cach country. (2 points) (d) Calculate CS, PS, GS, and TS in both countries. Which country gains? How big are the gains? (4 points) 2 $50 X $40 500 $30 $20 Sio O 0 4000 6000 Country A Country B Figure 1: Problem IV

GS eans government surplus

Answer 1

Ans-1) Autarky means no tarde . So, we need to calculate the Consumer surplus, producer surplus and total surplus here for both countries eparately. There will be no government surplus as no tariff revenue is being generated here and all surplus is divided between consumer and producer.

Country A autarky calculations-:

• Consumer surplus = Area of trinagle above equilibrium price $40 and below the demand curve.

= 1/2 (base)(height)

= 1/2(6000)(50-40)

= 1/2(6000)(10)

= $ 30,000

• Producer surplus = Area of triangle below equilibrium price and above supply curve

= 1/2(base)(height)

= 1/2(40-10)(6000)

= 1/2(30)(6000)

= $90,000

• Total surplus = Consumer surplus + producer surplus

= 30,000 + 90,000

= $120,000

Country B calculations -:

• Consumer surplus = 1/2(base)(height)

= 1/2(4000)(40-30)

= 1/2(4000)(10)

= $20,000

• Producer surplus = 1/2(base)(height)

= 1/2(30-20)(4000)

= 1/2(10)(4000)

= $20,000

• Total surplus = Consumer surplus + producer surplus

= 20,000+20,000

= $40,000

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