Question

In: Economics

There are 2 countries, A and B. They each have a demand curve: P=60-Q The supply...

There are 2 countries, A and B.

They each have a demand curve: P=60-Q

The supply curve for A is: P=Q

The supply curve for B is: P=3Q

A)     Calculate the market clearing price and quantity for each country separately. Calculate CS and PS for each country. (8 answers, 0.5 points each)

Now assume the countries can trade at a world price of: P=36

B) Find the quantity demanded and the quantity supplied in each country. Calculate the new CS and PS for each country. (8 answers, 0.5 points each)

C) Summarize the impact of trade. (2 points)

Solutions

Expert Solution

A) For country A

demand curve P=60-Q

supply curve for A is: P=Q

In equiliibrium demand = supply

60-Q= Q

So, Q= 60/2= 30, P=Q=30

CS= area under demand curve till equilibrium quantity,

CS= 1/2(60-30)(30)= 450

PS= 1/2(30)(30)= 450

For country B

demand curve P=60-Q

supply curve for B is: P=3Q

In equilibrium demand= supply

60-Q= 3Q

So, Q= 60/4= 15 and P= 3Q= 45

CS= 1/2(60-45)(15)= 112.5

PS= 1/2(15)(15)= 112.5

B) If P=36

Quantity demanded in country A will be:

36= 60-Q, So Q= 24

Similarly quantity demanded in country B will be Q=24

Quantity supplied in country A will be

P=Q= 24

Quantity supplied in country B will be

Q= P/3= 36/3= 12

CS in country A= 1/2(60-36)(24)= 288

PS in country A= 1/2(36)(24)= 432

CS in country B= 1/2(60-36)(24)= 288

PS in country B= 1/2(36)(12)= 216

C) with trade in country A prices rise from 30 to 36 and hence CS falls from 450 to 288 and producer surplus also falls. but in country B there is excess demand in the economy.


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