Question

Now let’s say that the market for barley in Germany is: Demand function: Q = 12 - P ; Supply function: Q = P - 4

a. Find the equilibrium price and quantity for Germany and graph it.

b. Using the same $7/bushel world price. Calculate and show graphically the amount Germany produces and consumes domestically.

c. Fill out a welfare table to show the following: consumer surplus (CS), producer surplus (PS), any government costs or revenue, and net change comparing autarky to trade.

d. Numerically calculate the monetary value of the net changes to producer and consumer surplus. Is Germany better off for trading?

e. Compare your answers in D to H. What is the total world consumer and producer value in trading barley?

Answer 1

Demand function: Q = 12 - P ; Supply function: Q = P - 4

a. At the equilibrium Qd = Qs

12 - P = P - 4

16 = 2P

P = $8 per unit

Q = 8 - 4 = 4 units

This is the equilibrium price and quantity for Germany

b. Now there is a world price of $7/bushel world price. Domestic demand is Q = 12 - 7 = 5 units and domestic supply is Q = 7 - 4 = 3 units. Hence there are imports = 5 - 3 = 2 units

c. Before trade:

CS = 0.5*(12 - 8)*4 = $8

PS = 0.5*(8 - 4)*4 = $8

TS = CS + PS = $16

There is no government revenue

After trade

CS = 0.5*(12 - 7)*5 = $12.5

PS = 0.5*(7 - 4)*3 = $4.5

TS = $17

There is no government revenue

d. Germany is better off for trading because CS rises by $4.5 but PS falls by $3.5. Hence net welfare rises by $1.00.

e. Total surplus rises from $16 to $17 as a result of trade