Question

1. Welfare effects of free trade in an exporting country Consider the Kenyan market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in Kenya in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium. When Kenya allows free trade, the country's consumer surplus (Increase/ Decrease) by $__________, and producer surplus (Decrease/Increase) by $_____. So, the net effect of international trade on Kenya's total surplus is a (Gain/Loss) of $___________.

920Domestic Demand Domestic Supply ks) Equilibrium without Trade 800 740 2 680 Consumer Surplus C 620 C2 Ш 560 CO fr. Producer Surplus 500T 440 380 320 --+ 0 45 90 135 180 225 270 315 360 405 450 QUANTITY (Tons of lemons)

Based on the previous graph, total surplus in the absence of international trade is $ The following graph shows the same domestic demand and supply curves for lemons in Kenya. Suppose that the Kenyan government changes its nternational trade policy to allow free trade in lemons. The horizontal black line (Pw) represents the world price of lemons at $800 per ton. Assume that Kenya's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place Use the green triangle (triangle symbol) to shade consumer surplus, and then use the purple triangle (diamond symbol) to shade producer surplus.

920Domestic Demand Domestic Supply 860 Consumer Surplus 800 740 680- Producer Surplus 620 Ш 560 OC 500 440 T 380 320 0 45 90 135 180 225 270 315 360 405 450 QUANTITY (Tons of lemons)

When Kenya allows free trade of lemons, the price of a ton of lemons in Kenya will be $800. At this price, demanded in Kenya, and emons. tons of lemons will be tons will be supplied by domestic suppliers. Therefore, Kenya will export tons of Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade. Without Free Trade With Free Trade (Dollars) (Dollars) Consumer Surplus Producer Surplus

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Answer 1

The Total surplus in the absence of International Trade will be 67500 dollar.The graph is given below.now in case of free trade of lemons

now when kenya allows free trade of lemons then at price 800 $ , 90 tons lemons will be demanded domestically and suppliers will supply 360 tons of lemons domestically then 270 tonnes can be exported.

	without free trade	free trade
Consumer surplus	33750	5400
producer surplus	33750	129600

When Kenya allows free trade, the country's consumer surplus ( Decrease) by$ 28350__________, and producer surplus (Increase) by $_95850____. So, the net effect of international trade on Kenya's total surplus is a (Gain) of $____67500_______.