Question

Suppose Demand is P=100-[10/3]Q and supply is P=Q.

Mark on a new diagram a world price of 30 (1 mark); explain why no goods will be bought or sold at the autarky price (1 mark); how much is demanded at price 30? (1 mark); how much is supplied (1 mark); explain what happens to the difference between supply and demand at that price (1 mark).

Question 3 Mark on a new diagram a world price of 20 (1 mark); explain why no goods will be bought or sold at the autarky price (1 mark); how much is demanded at price 20? (1 mark); how much is supplied (1 mark); explain what happens to the difference between demand and supply at that price (1 mark).

Question 4 Mark on two new diagrams (i) a negative consumption externality with a constant value of -20 for every unit consumed and seperately (ii) a negative production externality with a constant value of -20 for every unit consumed.

Does free trade always improve welfare? (1 mark) Consider a market with the production and consumption externalities described in Question 4 (seperately, not together), and explore the cases when the world price is 20 or 30.

(i) no trade with only a production externality vs (ii) importing with only a production externality and

(iii) exporting with only a production externality. Then consider the consumption externality case by calculating welfare in the following cases (again, 1 mark each) (iv) no trade with only a consumption externality vs (v) importing with only a consumption externality and (vi) exporting with only a consumption externality.

Answer 1

Question 1)

at autarky price, demand equals supply implies Q=100-(10/3)Q

Q=23.08 and P=23.08

and if world price is 30, the graph would be as follows:

no good would be bought or sold at the autarky price which is the market clearing price when operating in a closed economy but here we are considering world prices so the economy would produce or demand goods based on the world price.

At price 30, quantity demanded is 21units and quantity supplied is 30units as indicated in the above graph as well.

Quantity supplied is greater the quantity demanded means there will be a surplus in the economy and more are produced in order to supply to the world markets while also satisfying the domestic demand.