Question

Assume that the demand and supply curves for coffee in the US are:

Demand: P = 350 – QD Supply: P = 20 + 0.1QS
a) Determine the equilibrium prices and quantities if there is no international trade?

b) Determine the equilibrium quantities (supply and demand) for the US if the nation can trade freely with the rest of the world at a price of 60? In another word, find out the quantity demanded and supplied in the US at this new price?

c) What is the effect of the shift from autarky to free trade on US consumer surplus, on US producer surplus, and on overall US welfare? That is, find out the autarky consumer surplus, producer surplus, and national welfare (CS+PS). Then find out the CS, PS and national welfare with the new price of 60. How have CS, PS, and welfare changed?

Answer 1

Welfare of country improves when price under free trade is higher than autarky price. Consumers lose while producers gains from this.