Question

Microeconomics Questions

Price of Sandalwood Domestic Supply $800 $600 Domestic Demand Q, Q, Q Quantity of Sandalwood The graph above shows the domestic market for sandalwood in equilibrium at a price of $800 per kilogram in the absence of international trade. Now assume the country begins to engage in international trade, and sandalwood is selling at a price of $600 per kilogram in the world market. Which of the following would most likely result? a) The country would increase domestic production to become competitive in the world market b) The country would export sandalwood, and its domestic consumer surplus would increase c) The country would export sandalwood, and its total surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases d) The country would import sandalwood, and its total surplus would decrease, with both the domestic consumer surplus and the domestic producer surplus decreasing e) The country would import sandalwood, and its total surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases

Answer 1

1. Answer: The following is the most likely result with the beginning of international trade. c. The country would import sandalwood, and its total surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases. Before international trade the consumer surplus is the area 'F' but after the beginning of international trade, sandal wood is available at a price of $600. This lower price cause a reduction in producer surplus by the area G, but it is transferred to the consumers. There is a net increase in consumer surplus by the area 'J' and 'K'. It means that consumer surplus increase by more than the domestic producer surplus decreases. Price Market for oranges Supply Demand - Quantity 5 10 15 20 Answer: C. consumer surplus is $50 and producer surplus is $50. Equilibrium price is $10 and the equilibrium quantity is 10 units. Consumer surplus is the area below the demand curve and above the price line. The area is base x height/2(10x10/2). Producer surplus is the area above the supply curve and below the price line. The value of this area is base x height/2(10x10/2).

Answer 2

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