Question

Bell-land is a small country that currently practices autarky. In the market for transporters the supply and demand equations are given below

                                   Demand:   P = 400 – 4Q

                                   Supply:      P = 4Q

What is the equilibrium price and quantity.

Calculate consumer and producer surplus   

Now Bell-land decides to open trade. The world price for transporters is $100. Determine if Bell-land will import or export transporters. With trade what will be the new domestic quantity demanded? With trade what will be the new domestic quantity supplied? How much will Bell-land export or import?  

Calculate the new consumer and producer surplus. Who gains and who loses and by how much does each group gain or lose?

What type of trade barriers could a government put on to protect the losers?

Answer 1

a)

Demand: P = 400 - 4Q

Supply: P = 4Q

At equilibrium,

400 - 4Q = 4Q

400 = 8Q

Q = 50

P = 200

b)

Consumer Surplus is the area above the price line and below the demand curve. Green Triangle

Producer Surplus is the area above the supply line and below the price line. Blue Triangle

CS = Area of green triangle = 1/2*(400-200)*(50-0) = 5000

PS = Area of blue of triangle = 1/2*(200-0)*(50-0) = 5000

c)

Now world price = 100

At P = 100, demand will be 100 = 400 - 4Q. 4Q = 300, Q = 75

At P = 100, Supply would be 100 = 4Q, Q = 25

The country will import 75-25 = 50 units.

d)

Consumer Surplus is the area above the price line and below the demand curve. Green Triangle

Producer Surplus is the area above the supply line and below the price line. Blue Triangle

CS = Area of green triangle = 1/2*(400-100)*(75-0) = 11250

PS = Area of blue of triangle = 1/2*(100-0)*(25-0) = 1250

Thus consumers gain = 11250-5000 = 6250

Producer's loss - 5000-1250 = 3750

e)

The government can impose import tariffs or import quotas that will reduce import and will raise the domestic price and hence benefitting the producers.