Question

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Question

-Home’s demand curve for Christmas trees is,

D= 120−20P.

Its supply curve is,

S= 40 + 20P.

Derive and graph Home’s import demand schedule. What would the price of Christmas

trees be without any trade?

-Now add Foreign, which has a demand curve.

D^* = 100−20P

and a supply curve,

S^*= 60 + 20P

a) Derive and graph Foreign’s export supply curve and find the price of Christmas

trees that would prevail in Foreign in the absence of trade.

b) Now allow Foreign and Home to trade with eachother, at zero trade cost. Find and

graph the equilibrium under free trade. What is the world price? What is the volume of

trade?

Answer 1

ans

for home country

D=120-20P

S= 40+20P

for without trade price

D=S

120-20P = 40+20P

80 = 40P

P= 2

Q= 120-20P

= 120- 20*2 = 80

now import demandcurve can be determined by subtracting home supply from domestic demand below the equilibrium price

MD= D-S

=120-20P - 40- 20P= 80-40P

MD=80-40P

ans a) foreign market without trade

D* = 100−20P

S*= 60 + 20P

without trade equilibrium

D* = S*

100−20P =60 + 20P

40= 40P

P=1

so export supply curve of foreign country will be given supply minus domestic demand above price in foreign market without trade

XS = 60+20P -100+20P

XS = -40 +40P

b)

under free trade

trade will take place where import demand= export supply

MD=80-40P

XS = -40 +40P

80-40P =-40 +40P

120 = 80P

P= 1.5 is the world price

volume of trade = MD= XS = -40+40 (1.5) = 20

P	MD=80-40P
2	0
1.5	20
1	40

P	XS=-40+40P
1	0
1.5	20
2	40