1) When trade in coffee is allowed, producer surplus in Guatemala
a. increases by the area B + D.
b. increasesbytheareaB+D+G.
c. decreases by the area C + F.
d. decreases by the area G.
2) When trade is allowed,
a. Guatemalan producers of coffee become better off and Guatemalan consumers of coffee become worse off.
b. Guatemalan consumers of coffee become better off and Guatemalan producers of coffee become worse off.
c. both Guatemalan producers and consumers of coffee become better off. d. both Guatemalan producers and consumers of coffee become worse off.
3) Relative to the no-trade situation, trade with the rest of the world results in
a. Guatemalan consumers paying a higher price for coffee.
b. a decrease in producer surplus in Guatemala.
c. a decrease in total surplus in Guatemala.
d. All of the above are correct.
4) In the absence of trade, total surplus in the Guatemalan coffee market amounts to
a. 750.
b. 1,100.
c. 1,514.
d. 1,650.
5) With trade, total surplus in the Guatemalan coffee market amounts to
a. 1,250.
b. 1,468.
c. 1,870.
d. 1,980.
Homework Answers
(1) At the initial equilibrium point (i.e., the intersection of domestic demand and domestic supply) the producer surplus is equal to the area of region C+F.,
With trade (at the world price) the producer surplus is equal to the area of region C+F+B+D+G.
Hence When trade in coffee is allowed, producer surplus in Guatemala is increased by the area B+D+G.
Answer: Option (B).
(2) When trade is allowed, Guatemalan producers of coffee become better off and Guatemalan consumers of coffee become worse off because producer surplus will rise and consumer surplus will fall.
Answer: Option (A)
(3) Relative to the no-trade situation, trade with the rest of the world make Guatemalan consumers paying a higher price for coffee.
Answer: Option (A)
(4) In the absence of trade total surplus was the area of region A+B+D+C+F.
Total surplus = (0.50) (140-30) (30-0)
Total surplus= (0.5) (110) (30)
Total surplus = 1650.
Answer: Option (D)
(5) with the trade total surplus was the area of the region of A+B+D+G+C+F
total surplus = (0.5) (140-110)(18-0) + (0.5) (110-30) (40-0)
Total surplus = (0.5) (30) (18) + (0.5) (80) (40)
Total surplus = 1870
Answer: Option (C)
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