Question

Scenario 9-1
The before-trade domestic price of tomatoes in the United States is $500 per ton. The world price of tomatoes is $400 per ton. The U.S. is a price-taker in the tomatoes market.

Refer to Scenario 9-1. If trade in tomatoes is allowed, the price of tomatoes in the United States

a. will be unaffected, and consumer surplus will be unaffected as well.

b. will increase, and this will cause consumer surplus to decrease.

c. could increase or decrease or be unaffected; this cannot be determined.

d. will decrease, and this will cause consumer surplus to increase.

Answer 1

Answer...... d . Will decrease and this will cause consumer surplus to increase.

Explanation:- world price of tomatoes =$400 per ton , while U.S. price of tomatoes =$500 per ton , so if (free) trade is allowed then U.S. price will decrease to $400. At this new price in U.S. quantity demand of tomatoes will increase , Thus a fall in the price and increase in the quantity demanded, the consumer surplus will increase.

before trade C.S. = 1/2 ×( consumer's intended price —500)×Q

New consumer surplus =1/2( consumer's intended price —400)×(Q+ $\Delta$ Q)