Question

Scenario 9-1 The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches. 30. Refer to Scenario 9-1. If trade in peaches is allowed, the price of peaches in the United States will increase, and this will cause consumer surplus to decrease b. will decrease, and this will cause consumer surplus to increase. will be unaffected, and consumer surplus will be unaffected as well. d. could increase or decrease or be unaffected; this cannot be determined.
Please explain why.

Answer 1

30) US is a price taker and world price is greater than US price. Hence, after trade, world price becomes US price and so price increases. Consumers are at a loss because price they pay is increased and they now buy fewer units. Hence consumer surplus declines. Select A

31) At world price of P1, domestic consumers demand Q4. Select B

32) They raise the price of imports and since import function is inversely related to price, imports are reduced. However they also raise the price of domestic goods when market supply decreases. Select C

33) Select B. This is infant industry argument which says new firms should be protected from foreign competition