Question

Consider the following trade situation:

The U.S. demand for imports of tomatoes from Mexico is Q_D = 24 - P

The supply of tomatoes to the United States from Mexico is Q_S = 6 + P

The units are million boxes and U.S. dollars per box

One U.S. dollar buys 10 Mexican pesos

1. Draw a graph showing clearly the quantity of US imports of tomatoes from Mexico and their price in dollars

2. There is free trade in tomatoes (no tariffs or quotas on imports from Mexico), but the Mexican peso increases in value against the dollar, so that one dollar only buys 5 pesos. The cost of tomatoes for the U.S. consumer is now double what it was in the base case for each quantity imported. In the table below show the quantity of imports supplied at various prices before (from the equation above) and after the change in the currency values.

Quantity of Tomatoes	US Price before currency change	Mexican Price	US Price after Currency Change
3
4
5
6
7
8
9
10
11
12

3. Draw a graph of the problem in U.S. dollars, showing clearly the price that U.S. importers (the buyers) pay and the quantity of trade that will occur.

4. What is the equation for the new supply curve? How has the change in currency values affected the shape of the supply curve? How has it affected the responsiveness of Mexican tomato supply to changes in US prices?  

5. What is the price of tomatoes in pesos before and after the change in the value of the peso?  What is the price in dollars before and after the change?

Answer 1

Solution: