Question

Home’s demand curve for wheat is D = 100-20P. Its supply curve is S = 20 + 20P. Suppose that Home is a small country.

a. Graph the demand and supply curves.

b. In the absence of trade, what would the price of wheat be in Home?

c. The price of wheat in the world market is 1.5. What is the free-trade equilibrium price of wheat in Home?

d. Determine the amount of domestic production, domestic consumption, and imports of wheat in Home under free trade.

Answer 1

a.

Price ($)	Quantity demanded	Quantity supplied
0.00	100	20
0.50	90	30
1.00	80	40
1.50	70	50
2.00	60	60
2.50	50	70
3.00	40	80
3.50	30	90
4.00	20	100
4.50	10	110
5.00	0	120

b. From the above graph, we observe that the demand curve and the supply curve intersect when the price = $2 and the quantity = 60 units

In autarky, the price of wheat in Home = $2

c. As it is given that Home is a small country, opening up Home for trade does not affect the world price and the price of wheat in Home would be equal to the world price.

Hence, the price of wheat in Home under free trade = $1.50

d. When price of wheat = $1.50, we obtain from the above table that the domestic quantity demanded(Domestic consumption) = 70 units and the domestic quantity supplied(Domestic production) = 50 units

As the domestic quantity demanded is higher than the domestic quantity supplied, the excess demand in Home would be met through imports

Quantity of imports in Home = Excess demand = Domestic quantity demanded - Domestic quantity supplied = 70 - 50 = 20 units