Question

Assume that all prices are stated in US dollars.   Ignore quality differences in the product.

          US demand and supply                                    Mexico demand and supply

Quantity demanded	Quantity supplied	Price	Quantity demanded	Quantity supplied
1000	0	$1	600	0
800	800	$3	500	50
700	1000	$5	400	100
600	1200	$7	350	150
500	1400	$8	200	200
400	1600	$10	0	300

1.  If US and Mexico are currentlynot engaging in international trade, determine the quantity purchased and produced in each country.  Justify your answer

2.  If US and Mexico engage in international trade, determine the world price of corn, world consumption of corn, and world production of corn.  Justify your answer.

Answer 1

1)

In USA: The equlibrium price is $3.

At $3, the quantity demanded is equal to quantity demanded, hence the equilibrium quantity is 800. Therefore, when the quantity supplied meets the demanded quantity requirement we can say that the quantity purchased and produced in USA is 800.

In Mexico: The equlibrium price is $8.

At $8, the quantity demanded is equal to quantity demanded, hence the equilibrium quantity is 200. Therefore, when the quantity supplied meets the demanded quantity requirement we can say that the quantity purchased and produced in Mexico is 200.

2)

When engaged in world trade, to determine the world price the Total Quanitity supplied should be equal to total quantity demanded.

Therefore at price $5,

Total Quantity Demanded = 700 + 400 = 1100

Total Quantity Supplied = 1000 + 100 = 1100

Therefore the world price should be set at $5.

World Consumption of Corn = 700 + 400 = 1100.units

World Production of Corn = 1000 + 100 = 1100 units