1. Assume that Australia and the UK are the only producers wine in a perfectly c
ID: 1138101 • Letter: 1
Question
1. Assume that Australia and the UK are the only producers wine in a perfectly competitive market. Below are domestic supply and demand cequations and their corresponding autarky equilibrium price and quantity of wine. Australia Qs=3500+100P, Qd=9500-100P.. UK Qs=50P and Qd=6000-50P. 1. Use the supply and demand equations above to derive the equation for import demand and the equation for export supply of wine. 2. Use your equation for import demand and export supply to solve for the international equilibrium price and quantity traded.
Explanation / Answer
Autarky equilibrium in Australia
Qd = Qs
9500 - 100P = 3500 + 100P
200P = 6000
P = 6000/200 = 30
Qd = 9500 - 100P = 9500 - (100*30) = 9500 - 3000 = 6500
Thus, in autarky,
Equilibrium price in Australia = 30
Equilibrium quantity in Australia = 6,500
Autarky equilibrium in UK
Qd = Qs
6000 - 50P = 50P
100P = 6000
P = 6000/100 = 60
Qd = 6000- 50P = 6000 - (50*60) = 6000 - 3000 = 3000
Thus, in autarky,
Equilibrium price in UK = 60
Equilibrium quantity in UK = 3,000
Domestic price in UK is higher than the domestic price in Australia.
This means that if these two countries enter into trade then Australia will export wine while UK will import wine.
Equation for export supply can be derived by subtracting Australia's demand equation from Australia's supply equation.
Export supply (Qes) = Supply equation - Demand equation
Qes = Qs - Qd
Qes = 3500 + 100P - (9500 - 100P)
Qes = 3500 - 9500 + 200P
Qes = 200P - 6000
Thus,
The equation for export supply is Qes = 200P - 6000
Equation for import demand can be derived by subtracting UK's supply equation from UK's demand equation.
Import demand (Qid) = Demand equation - Supply equation
Qid = Qd - Qs
Qid = 6000 - 50P - 50P
Qid = 6000 - 100P
Thus,
The equation for import demand is Qid = 6000 - 100P
(2)
Equating import demand and export supply to determine international equilibrium
6000 - 100P = 200P - 6000
300P = 12000
P = 12000/300 = 40
Qid = 200P - 6000 = (200*40) - 6000 = 8000 - 6000 = 2000
Thus,
The international equilibrium price is 40.
The international equilibrium quantity traded is 2000.
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