Question

Consider the Bolivian market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in Bolivia. Suppose Bolivia's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in Bolivia in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium 1000 Domestic Demand Domestic Supply 900 Equilibrium without Trade 800 700 Consumer Surplus 800 PRICE (Dollars perton) 500+ Producer Surplus 400+ 300 200 100 400 450 500 0 50 100 150 200 250 300 350 QUANTITY (Tons of lemons)

Answer 1

Answer 2

Ans.

Graph 1 -

1000 Domestic Demand Domestic Supply 900 Equilibrium without Trade 800 700 Consumer Surplus 800 PRCE (Dollars perton) 500 Producer Surplus 400 300 200 100 400 450 500 0 50 100 150 200 250 300 350 QUANTITY (Tons of lemons)

In the absence of International trade -

Producer Surplus = 1/2 x (500 - 0 ) x ( 250)

                             = 1/2 x 500 x 250 = 62,500

Consumer Surplus = 1/2 x ( 1000 - 500 ) x ( 250 )

                               = 1/2 x 500 x 250 = 62,500

Total Surplus = Producer Surplus + Consumer Surplus

                      = 62500 + 62500

                      = $125,000

Total surplus in the absense of int. trade is $125,000 ( 1st Blank )

Graph 2 -

1000 Domestic Demand Domestic Supply 000 Consumer Surplus 800 Pw 700 000 Producer Surplus PRCE (Dollars perton) 500 400 300 200 100 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Tons of lemons)

At the price of $800 , 100 ( 2nd blank ) tons of lemon will be demanded.

and 400 ( 3rd blank) tons will be supplied.

So Bolivia will export 300 (4th blank) tons ( 400 - 100 )

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	without free trade	with free trade
Consumer Surplus	62500	10000
Producer Surplus	62500	160000

Free trade,

Consumer surplus = 1/2 x ( 1000 - 800 ) x 100

                              = 1/2 x 200 x 100 = 10,000

Producer surplus = 1/2 x ( 800 - 0 ) x 400

                             = 400 x 400 = 160,000

Total surplus = 10000 + 160000 = 170,000

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the country's consumer surplus decreased by 52500 ( 62500 - 10000 ) .

the producer surplus increased by 97500 ( 160,000 - 62500 ) .

net affect in total surplus is a gain of 45000 ( 170,000 - 125,000 )

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