Question

Consider two Regions, A and B, each with supply and demand schedules as follows:

Region A: Demand: P=80-Q Supply: P=20+Q

Region B: Demand: P=120-4Q Supply: P=2Q

Suppose the transfer cost between the two regions is 20. How much of the commodity will be traded from the potential exporter to the potential importer?  

a) 40

b) 10

c) None of these

d) 20

Answer 1

In region A , demand= supply i.e. 80-Q=20+Q 2Q= 60 Q=30 . If Q=30 then P = 80-30 = 50

In region A equilibrium price is P=50 and quantity is Q=30.

In region B, 120-4Q=2Q 6Q=120 Q=20 then P= 40

In region B equilibrium price is P=40 and Q= 20

Price in region B is less than in region A, thus region B is a potential exporter and A is the importer . when P=40, demand in A is 40 and supply is 20. Region B exports 20 units to A.