Question

The graph below shows a small country that produces wine, with no international trade, existing in a state of autarky. PLEASE CHECK A & B AND WRITE OUT THE ANSWERS TO C & D. I was not able to figure out answers c & d.

Market for Wine 80 75 70 65 60 Tools world Od 50 45 2 40 35 30 25 a20 15 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Quantity (mions of barrels)

a. What is the initial market price and quantity of wine traded in equilibrium?

     P_e: $40 per barrel

     Q_e: 7 million barrels

b. Now suppose this small country opens its markets to international trade. Suppose the world price for wine is $60 per barrel. In the graph above, indicate the world price, the domestic quantity supplied (Q_s), and the domestic quantity demanded (Q_d).

Instructions: Use the tool provided 'P_world' and draw a horizontal world price such that the first point touches the vertical axis. Use the tools provided 'Q_s'and 'Q_d' to indicate the domestic quantity supplied and domestic quantity demanded.

c. At the world price of $60 per barrel, this small nation will  (Click to select)  export  experience a surplus of  experience a shortage of  import   million barrels of wine.

d. A result of this small country opening its wine market to international trade is that:

both domestic consumers and domestic producers benefit.

domestic producers benefit while domestic consumers lose.

domestic consumers benefit while domestic producers lose.

both domestic consumers and domestic producers lose.

Answer 1

3) At the world price of $60 per barrel, this small nation will export and experience a surplus of 8 million barrel of wine.

Explanation: When the world price exceeds the no-trade domestic price then domestric traders export and earn a surplus of 8 million barrel of wine (= 11 million - 3 million)/

4) Solution: domestic producers benefit while domestic consumers lose

Explanation: When the world price exceeds the no-trade domestic price, then domestic consumers lose and domestic producers gain as a result of free trade