Answered: Consider the Bolivian market for…

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter18: Gaining From International Trade

Section: Chapter Questions

Problem 14CQ

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1. Welfare effects of free trade in an exporting country

Consider the Bolivian market for lemons.

The following graph shows the domestic demand and domestic supply curves for lemons in Bolivia. Suppose Bolivia's government currently does not allow international trade in lemons.

Use the black point (plus symbol) to indicate the equilibrium price of a tonne of lemons and the equilibrium quantity of lemons in Bolivia in the absence of international trade. Then, use the green point (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium.

1100
Domestic Demand
Domestic Supply
1000
Equilibrium without Trade
900
800
Consumer Surplus
700
600
500
Producer Surplus
400
300
200
100
35
70
105
140
175
210 245
280
315
350
QUANTITY (Tonnes of lemons)
Based on the previous graph, total surplus in the absence of international trade is $
PRICE (Dollars per tonne)

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