As a World Bank economist, you are given the following information about demand

Question

As a World Bank economist, you are given the following information about demand and supply conditions for product X in countries A and B. Demand for X in Country A: Supply of X in Country A | 0 70-2P 10 +2P Qg-70-2P Demand for Xin Country B: | Supply of X in Country B: 4+P Answer the following questions based on the information provided: 1. 2. 3. 4. Which country has comparative or absolute advantage in producing X? What are the equilibrium price and quantity in country A under autarky? What are the equilibrium price and quantity in country B under autarky? Suppose countries A and B decide to engage in international trade. What is the price they agree on to exchange product X? a. b. c. Which country exports X and which country imports X and how much? What is the total production of product X in each country after trade? 5. In the following table, report the consumer surplus and producer surplus before and after trade for each country: After Trade Consumer Surplus Consumer Surplus Producer Surplus Producer Surplus Before Trade Country A Consumer Surplus Country B Consumer Surplus Country A Country B Producer Surplus m Producer Surplus e

Explanation / Answer

1) Since for both countries Demand function is same for same Price but they only differ in Supply Function and for Country A Supply function=10+2P> 4+P(supply function for B) for same price hence A will be having absolute advantage in producing X

2) Under Autarky Country will be self sufficient and hence Demand will equal to supply this gives

70-2P=10+2P this gives P=15 and Qs=Qd=40

3)Qs=Qd therefore 70-2P= 4+P this gives P=22 and Qs=Qd=26

4a)If international Trades is there then Total Qs=Total Qd this gives 140-4P=14+3P therefore P=18 and Q=68

b) For both supply and demand at P=18 QsB=4+P=22 and QdB=70-2P=34 hence B needs to import 34-22=12 units from country A so A export 12 units of X to B

c) Country A will produce=10+2P=10+2*18=46 units of X and Country B will produce=4+P=22 Units of X

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