Question

2) Suppose that China opens up its aircraft market to international trade and the world price of an aircraft becomes $100 million. China becomes an (either importing or exporting) country because the world price is (either lower or greater) than the domestic price. The amount of import is aircrafts because the domestic quantity demanded is aircrafts and the domestic quantity supplied is aircrafts. Consumer surplus is $ million and consumer surplus increases by $ million compared to closed economy. Producer surplus is $ million and producer surplus declines by $ million compared to closed economy. Total surplus is $ million and total surplus increases by $ million, which is called gains from trade.

Answer 1

A 120 bo 110 World Price 100 3 Sol 20 40 60 go 100 Puentity

China becomes an net importer because world price is lower than domestic price.

Thw amount of imports is 100 - 20 = 80 aircrafts because domestic quantity demanded is 100 units and domestic supply is 20 units.

Consumer surplus is area of portion A whose sum is (1/2) * (150 - 120) * (60 - 0) = 900 and it rises by area of portion B + C + D + E + F + G + H + I + K + L whose sum is (120 - 100) * (60 - 0) + (1/2) * (120 - 100) * (100 - 60) = 1,600 compared to close economy

Producer surplus is area of portion B + E + J whose sum is (1/2) * (120 - 90) * (60 - 0) = 900 and it falls by area of portion B + E + L + K whose sum is (120 - 110) * (40 - 0) + (110 - 100) * (20 - 0) + (1/2) * (120 - 110) * (60 - 40) + (1/2) * (110 - 100) * (40 - 20) = 800 compared to close economy

Total surplus is area of portion A + B + E + J whose sum is (1/2) * (60 - 0) * (150 - 90) = 1,800 and it rises by area of portion C + D + F + G + H + I whose sum is (1/2) * (120 - 100) * (100 - 20) = 800 compared to close economy