Question B: Suppose now that country B can trade freely. The world price is 25, explain why no goods will be bought or sold at the autarky price; how much is demanded at price 25? how much is supplied? explain what happens to the difference between supply and demand at that price. How large is welfare under free trade?
Please answer for Question B
Background: Country A is a relatively “rich” (developed) country, while country B is a relatively “poor” developing country. The model we will be using for trade is a simple supply and
Question A: Suppose the demand in the poor country is P=100- 9Q and supply is P=Q. Suppose the supply in the poor country is different from the one in country A only because it faces less strict environmental regulations. That is, in country B it costs firms Q to produce Q units, whereas it costs 2Q in country A to produce quantity Q. Draw country B’s demand and supply diagram in 'autarky' with the standard axes (P vertical, Q horizontal) and then work out the equilibrium. How large is welfare under autarky?
Question B: Suppose now that country B can trade freely. The world price is 25, explain why no goods will be bought or sold at the autarky price; how much is demanded at price 25? how much is supplied? explain what happens to the difference between supply and demand at that price. How large is welfare under free trade?
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