Consider the New Zealand market for lemons The following graph shows the domesti

Question

Consider the New Zealand market for lemons The following graph shows the domestic demand and domestic supply curves for lemons in New Zealand. Suppose New Zealand's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in New Zealand in the absence of international trade. Then, use the green points (triangle symbols) to shade the area representing consumer surplus in equilibrium. Finally, use the purple points (diamond symbols) to shade the area representing producer surplus in equilibrium. Note: Select and drag anarea from the palette to the graph.

Explanation / Answer

Seems like you are struggling with the calculations of consumer and producers surplus. Just use a simple formula of triangle 1/2 x base x height.

in the first question where we have to calculate total surplus in absence of international trade. The base of the triangle i.e (price) sum total of green area and purple are is 700, for only consumer or producer surplus we just half the number and the height i.e. altitude is 125.

So using the values in the formula we get 1/2 x 350 x 125. We get total consumer surplus or producer surplus (both the triangle is same) we get 21,875. Total surplus will be 21,875 x 2 = 43,750 million.

Coming to the second part

In absence of free trade total producer surplus was 21,875 and consumer surplus was 21,875.

With the trade, the triangle of consumer surplus has increased considerably. The new height of this triangle representing consumer surplus is 175. and base of this triangle is 490(the difference between current price and the price which the last consumer is ready to give ).

Using the value in our formula we get 1/2 x 175 x 490 = 42,875.

For calculating the producer surplus we use 1/2 x 210 x 75, we get 7875 as total producer surplus.

So, when New Zealand free trade its consumer surplus increased from 21,875 to 42,875 a net increase of 21,000.

And its producer surplus decreased from 21,875 to 7875. a net decrease of 14000.

A net increase in overall surplus is 7000.

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