Question

Suppose the domestic supply and demand curves for bicycles in the United States are given by the following set of equations:

Q^S = 2P

Q^D = 200 – 2P.

Demand and supply in the Rest of the World is given by the equations:

Q^S = P

Q^D =160 – P.

Quantities are measured in thousands and price in U.S. dollars.

After the opening of free trade between the U.S. and the Rest of the World:

Group of answer choices

One cannot determine who gains more.

Neither the U.S. nor the Rest of the World gain from trade

Both countries gain from trade, but the U.S. gains more

Both countries gain from trade, but the Rest of the World gains more

Answer 1

Ans: Both countries gain from trade, but the Rest of the World gains more.

Explanation:

Before trade, U.S equilibrium price is:

2P = 200 - 2P

4P = 200

P = 200 / 4 = $50

Before trade, Rest of the World equilibrium price is:

P = 160 - P

2P = 160

P = 160 / 2 = $80

So, after the opening of free trade between the U.S. and the Rest of the World, the world price will be less than $80. So, the Rest of the World gains more.