Question

Suppose the domestic supply and demand for snowboards in Canada are given by the following equations: QS = –110 + 3P QD = 390 – 2P

[a] In the absence of international trade in snowboards, what will the domestic price be?

[b] In the absence of international trade in snowboards, how many snowboards will be sold in Canada?

c) If Canada could trade snowboards freely with the rest of the world at the price of $80, how many snowboards will be produced in Canada?

[d] If Canada could trade snowboards freely with the rest of the world at the price of $80, how many snowboards will be purchased in Canada?

e) If Canada trades snowboards freely with the rest of the world at the price of $80, should Canada import or export snowboards? And how many?

[f] In the absence of trade, what is the consumer surplus and producer surplus in Canada for the snowboard market? Show them graphically.

[g] If Canada could trade snowboards freely with the rest of the world at the price of $80, what is the consumer surplus and producer surplus in Canada for the market for snowboards? Show them graphically.

[h] What is the change in total surplus after the opening of free trade?

Answer 1

a)

In the absence of international trade,

QS=QD

–110 + 3P= 390 – 2P

5P=500

P=100

Equilibrium price=$100 per unit

b)

QS=–110+3*100=190

Canada will produce 190 snowboards

c)

QS =–110+3P=-110+3*80=130

Canada will produce 130 snowboards at a world price of $80

d)

QD=390–2P=390-2*80=230

230 snowboards will be purchased in Canada at a world price of $80

e)

Quantity demanded is higher than the quantity produced. Canada would import at a price of $80

Import=Shortage in market=QD-QS=230-130=100

Canada should import 100 snowboards.

f)

P	QS=-110+3P	QD=390-2P
0	0	390
36.67	0.00	316.67
40	10	310
60	70	270
80	130	230
100	190	190
120	250	150
130	280	130
140	310	110
160	370	70
180	430	30
195	475	0

Consumer surplus in absence of trade=1/2*(195-100)*(190-0)=$9025

Producer surplus in absence of trade=1/2*(100-36.6666)*(190-0)=$6016.67

Total Surplus=CS+PS=9025+6016.67=$15041.67

e)

Consumer surplus in presence of trade=1/2*(195-80)*(230-0)=$13225

Producer surplus in presence of trade=1/2*(80-36.6666)*(130-0)=$2816.67

Total Surplus=CS+PS=13225+2816.67=$16041.67

f)

Increase in total surplus=16041.67-15041.67 =$1000