Question

7. Suppose the following diagram illustrates an import model. Using this diagram, what is the area of consumer and producer surplus: a. in autarky? b. with imports? C with a trade tariff?

Answer 1

Consumer surplus is area above the market price and below the demand Curve

Producer surplus is area below the market price and above the supply curve.

A) In Autarky

At price equals to P_{​​​​​​A}

Consumer surplus = area ( B + C + D)

Producer Surplus = area ( E + F + G + J + K + P)

B) with imports

With free trade price will be at P_{​​​​​​w}​​​

Consumer surplus = area ( B + C + D + E + F + G + H + I + J + K + L + M + N+ O)

Producer Surplus = area ( P)

C) with trade tariff

Consumer surplus = area ( B + C + D + E + F + G + H + I )

Producer Surplus= area ( J + K + P)