Question

Consider the Sudanese market for tangerines. The following graph shows the domestic demand and domestic supply curves for tangerines in Sudan. Suppose Sudan's government currently does not allow international trade in tangerines. Use the black point (plus symbol) to indicate the equilibrium price of a ton of tangerines and the equilibrium quantity of tangerines in Sudan 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. Domestic Demand Domestic Supply Equilibrium without Trade Consumer Surplus PRICE(Dollars per ton) Producer Surplus + 25 + 50 0 225 250 75 100 125 150 175 200 QUANTITY (Tons of tangerines)
fill in the blanks

1)increase/decrease

2)increase/decrease

3)gain/loss

Answer 1

I can't access your graph tool, I'm marking relevant regions.

(1) In pre-trade equlibrium (intersection of domestic demand and supply curves):

Consumer surplus (CS) = Area between demand curve and price = Area AEP0

Producer surplus (PS) = Area between supply curve and price = Area BEP0

Domestic Demand Domestic Supply Equilibrium without Tri Consumer Surplus PRICE(Dollars per ton) Producer Surplus 0 25 50 225 250 75 100 125 150 175 200 QUANTITY (Tons of tangerines)

(2) Total surplus (TS) = CS + PS = Area AEB = (1/2) x $(620 - 320) x 125 = (1/2) x $300 x 125 = $18,750

(3) After trade, domestic price is Pw (= $500).

New CS = Area ACPw

New PS = Area BDPw

Domestic Demand Domestic Supply Pw PRICE(Dollars per ton) PL 0 25 50 75 100 125 150 175 200 QUANTITY (Tons of tangerines) 225 250

(4) At Pw = $500,

Quantity demanded (Qd) = 100

Quantity supplied (Qd) = 150

Exports = Qs - Qd = 150 - 100 = 50

(5)

(i) Without free trade,

CS = (1/2) x $(620 - 470) x 125 = (1/2) x $150 x 125 = $9,375

PS = (1/2) x $(470 - 320) x 125 = (1/2) x $150 x 125 = $9,375

(ii) With free trade,

CS = (1/2) x $(620 - 500) x 100 = 50 x $120 = $6,000

PS = (1/2) x $(500 - 320) x 150 = 75 x $180 = $13,500

(6) When Sudan allows free trade, CS decreases by $3,375 (= $9,375 - $6,000), PS increases by $4,125 (= $13,500 - $9,375). So net effect on total surplus is a gain equal to $750 (= Increase in PS - Decrease in CS = $4,125 - $3,375).