Consider the Colombian market for soybeans The following graph shows the domesti

Question

Consider the Colombian market for soybeans The following graph shows the domestic demand and domestic supply curves for soybeans in Colombia. does not allow international trade in soybeans. Suppose Colombia's government currently Use the black point (plus symbol) to indicate the equilitbrium price of a ton of soybeans and the equilbrium quantity of absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium 380 Domestic Demand 365 350 335 320 05 290 275 Domestic Supply Equilibrium without Trade Consumer Surplus Producer Surplus 260 245

Explanation / Answer

In the absence of Trade: Price = 305, Quantity = 125

Consumer Surplus = area of the green triangle = 1/2*base*height = 1/2*(380-305)*(125-0) = 1/2*75*125 = 4687.5

Producer Surplus = area of the purple triangle = 1/2*base*height = 1/2*(305-230)*(125-0) = 1/2*75*125 = 4687.5

Total Surplus = Consumer Surplus + Producer Surplus

= 4687.5 + 4687.5

= 9375

With International Trade

Pw = 350

Since world price is greater than domestic prices, the seller will export soybean at Pw=350.

Domestic prices will also rise to 350 and hence there will a fall in demand.

As per diagram, At Pw =350

Domestic demand = 50

Total Supply = 200

Thus exports = 200 - 50 = 150

With Free Trade:

Consumer Surplus = 1/2*base*height = 1/2*(380-350)*(50-0) = 1/2*30*50 = 750

Consumer Surplus = 1/2*base*height = 1/2*(350-230)*(200-0) = 12000

Total Surplus = 12750

Change in CS = 750-4687.5 = -3937.5

Change in PS = 12000-4687.5 = 7312.5

Change in Total Surplus = 12750-9375 = 3375

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