Question

Country X is a small country, with demand and supply functions for the food grains:

Q_D = 150 – 0.6P

Q_S = –40 + 0.5P

where Q_D and Q_S are in tons and P is the price per ton. The world price of grain is $200 per ton.

In a situation of free trade, how much food grains would be produced in Country X?

In a situation of free trade, how much food grains would be consumed in Country X?

In a situation of free trade, how much food grains would be traded (i.e. exported or imported) in Country X?

Answer 1

1.

Since there is free trade with world price of $200, this price is to be placed in Qs function in order to get quantity of production.

Qs = -40 + 0.5P

Or, Qs = - 40 + 0.5 × 200

Or, Qs = - 40 + 100

Or, Qs = 60

Answer: 60 units

2.

Since there is free trade with world price of $200, this price is to be placed in Qd function in order to get quantity consumed.

Qd = 150 – 0.6P

Or, Qd = 150 – 0.6 × 200

Or, Qd = 150 – 120

Or, Qd = 30

Answer: 30 units

3.

Since Qs is higher than Qd, there would be an export.

Export = Qs – Qd

            = 60 – 30

            = 30

Answer: 30 units