The following figure shows the domestic demand and domestic supply curves for t-
ID: 1103342 • Letter: T
Question
The following figure shows the domestic demand and domestic supply curves for t-shirts in Nicaragua. Assume that the world price in this market is $5 per t-shirt. Answer the questions below based on this figure.
1. Refer to Figure 2. With trade, Nicaragua
a. imports 300 t-shirts.
b. imports 500 t-shirts.
c. exports 300 t-shirts.
d. exports 200 t-shirts.
1. Refer to Figure 2. The change in total surplus in Nicaragua because of trade is
a. $4200, and this is an increase in total surplus.
b. $2350, and this is an increase in total surplus.
c. $4200, and this is a decrease in total surplus.
d. $2350, and this is a decrease in total surplus.
Price of t-shirts| 30 Domestic Supply 10 World Price 2 Domestic Demand 200 300 500 Quantity of t-shirtsExplanation / Answer
Q1
Answer
With trade, the price is $5
so the demand is 500 and supply of domestic firms is 200 units
import=demand-supply=500-200=300 units
Option a
Q2
Answer
total surplus is the area above supply curve and below demand curves left of market equilibrium.
Total surplus before trade=0.5*(30-2)*300=4200
Total surplus after trade=0.5*(30-5)*500+0.5*(5-2)*200
=6550
The change=6550-4200=2350
The increase in surplus is $2350
Option b
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