Question

Suppose in the world market, steel is sold at $5 per ton. The domestic demand and supply curves of steel in Canada are Q_d =28 – 2p and Q_s = -8 + 2p where Q measures the quantity in tons.

i. Calculate the amount of steel that will be produced and sold domestically. How much will be imported?

ii. Now suppose Canada completely bans free trade in steel. What will happen to the price and the quantity produced and sold in domestic market?

iii. What economic costs will occur to Canadians due to the trade ban as in part ‘b’?

Answer 1

i) Equilibrium occurs when Qd = Qs

28 - 2p = -8 + 2p

p = 9

At this price, Q = 10

If world price is $5, quantity demanded at this price is 18 while quantity supplied is 2 which result in import of 18 - 2 = 16 units.

ii)  If Canada ban free trade in steel, price will rise to 9 and quantity produced and sold in domestic market is 10.

iii) Due to ban in trade, consumer will loose at a result which result in decrease in consumer surplus from area of portion A + B + C + D to B while producer surplus increase from E to E + B. It result in net loss of C + D.