Question

4. Currently the world price of coffee is $8 per pound and the world price of tea is $2 per pound. Vandelay is a small country with the following points on linear supply and demand schedules for the country.   

Coffee                       Tea  

Demand       Supply       Demand       Supply

P   Q       P   Q       P   Q       P   Q  

12   60       12   180       12   0       12   240

10   70       10   150       10   40       10   200

8   80       8   120       8   80       8   160

6   90       6   90       6   120       6   120

4   100       4   60       4   160       4   80

2   110       2   30       2   200       2   40

0   120       0   0       0   240       0   0

a) Find the sum of consumer and producer surplus in each market if there is no trade.(2 points)

b) If world market is open, explain which good Vandelay will import and which they will export. (1 point)

c) Calculate the new consumer and producer surplus in Vandelay if free trade of both goods is allowed. (2 points)

d) Explain what will happen in the tea market if a $2/pound tariff is placed on imported tea. Explain why this could also have consequences in the Coffee market. (2 points)

Answer 1