Consumer & producer surplus: In the model we used in class (power point slide 16

Question

Consumer & producer surplus: In the model we used in class (power point slide 16) consumer and producer surplus. I want you to calculate the change in the other country (Rest of the world) as price increases from 700 to 1000

What is the change in the “rest of the world” consumer surplus and producer surplus after free trade (right panel )

Price with Dernand and Supply Curves A. The U.S. B. Intemational C. The Rest of the World's Motorbike Market Motorbike Market Motorbike Market Price (S/unit) Price (S/unit) Price (S/unit) 2,000 U.S. pretrade2,000 World price with trade price Exports S 1,000 700 1,000 700 1,000 Imports US Quantity (thousands) 15 40 65 Quantity 50 25 50 75 Quantity (thousands) (thousands) Sus U.S. supply as = U.S. demand Rest of world's supply Rest of world's demand -Rest-of-world supply of exports S D Dm = U.S. demand for imports Price Down Up Quantity Demanded Up Effects of Trade Quantity Supplied United States Rest of the world Down Up

Explanation / Answer

The consumers’ surplus has decreased and the producer surplus has increased.

Demand at $700 = 50

Revenue at $700 = 700 x 50 = $35000

Demand at $1000 = 25

Revenue at $1000 = 1000 x 25 = $25000

Net Loss in the rest of the world = 35000 – 25000 = $10000

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