Question

In 2020 the United States will use some $10 trillion of manufactured goods as measured by the price level as it will be in 2020—producing $9 trillion and paying for the extra $1 trillion by exporting services.

Let’s use that as our unit of the quantity of manufactures—$1 worth at 2020 prices is equal to one unit of manufactured goods. And let’s set our index of the price of manufactured goods in 2000 equal to 1.

Suppose the supply curve for manufactured goods has constant-returns-to-scale, with no producer having (much of) an opportunity cost advantage over any other.

Suppose the demand curve for manufactured goods is a straight line linear function such that an increase in the price from its 2000 value of 1 to a value of 2 would lead to a reduction in the quantity demanded by $1 trillion.

What will be the equilibrium price of manufactures in 2020?

What will be the equilibrium quantity?

What will the level of consumer surplus be in 2020?

What will the level of producer surplus be in 2020?

Suppose that a trade war shuts down imports of manufactures, and that U.S. producers have a maximum capacity of only $9 trillion of manufactures. What will be the trade war consumer surplus?

Suppose that a trade war shuts down imports of manufactures, and that U.S. producers have a maximum capacity of only $9 trillion of manufactures. What will be the trade war producer surplus??

Answer 1

According to the analysis demand curve and MC should be like this:

Qd = 10 - P { where, Qd in trillions }

MC = 1 { Constant returns to scale }

A. What will be the equilibrium price of manufactures in 2020?

Answer:    P* = MC = $1

B. What will be the equilibrium quantity?

Answer: Qd* = 10 - 1 = 9 trillions

C. What will the level of consumer surplus be in 2020?

Answer: Consumer Surplus = 0.5*(Qd*)*(10-P*)

= 0.5*9*9 = 40.5 sq. units.

D. What will the level of producer surplus be in 2020?

Answer: Producer Surplus = 0 (because P = MC)