Question

Suppose in the world market, steel is sold at $5 per ton. The domestic demand and supply curves of steel in Canada are Qd =28 – 2p and Qs = -8 + 2p where Q measures the quantity in tons.

i. Calculate the amount of steel that will be produced and sold domestically. How much will be imported?

ii. Now suppose Canada completely bans free trade in steel. What will happen to the price and the quantity produced and sold in domestic market?

iii. What economic costs will occur to Canadians due to the trade ban as in part ‘b’?

Answer 1

Answer to the question no. 1:

The domestic Qd=28-2P, and the supply is Qs=-8+2P. And the world price is Pw=5.

If the economy is open up the economy for free trade then the Quantity demanded at P=5 will be:

On the other hand, the domestic producer will produce will produce at price (P) $5 is:

Thus the domestic supply is 2 ton and the domestic demand is 18 ton meaning that the domestic supply has fall short of the domestic demand by 18-2=16 units. So, under free trade the country will import 16 ton of steel.

Answer to the question no. 2:

Now is the import is ban in canada then the equilibrium will be reached at a point where the Qd=Qs as:

Putting P=9 in the demand function we get:

Thus, in the absence of the free trade, the equilibrium price (P*) will go up from $5 to $9 and the equilibrium quantity (Q*) will decline from 18 Ton to 10 Ton.

Answer to the question no. 3:

We will find the total surplus of Canada in the presence and absent of the free trade.

First we will find the consumer surplus in the absence of free trade (CSNFT) as in the following picture:

Secondly, we will find the Producer surplus in the absence of free trade (PSNFT) as in the following picture:

So, the total surplus of the Canada in the absence of free trade (TSNFT) is:

Thirdly, we will find the consumer surplus in the presence of free trade (CSPFT) as in the following picture:

Fourthly, we will find the Producer surplus in the presence of free trade (PSPFT) as in the following picture:

So, the total surplus of the Canada in the pesence of free trade (TSPFT) is:

Thus, in the absence of free trade the total surplus (TSNFT) was 50. But, in the presence of free trade the total surplus (TSPFT) has increased by 32 from 50 to 82.

So, in the presence of free trade the Canada is better off.

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