Answered: onsider the Colombian market for…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the Colombian market for soybeans.

The following graph shows the domestic demand and domestic supply curves for soybeans in Colombia. Suppose Colombia's government currently does not allow international trade in soybeans.

Use the black point (plus symbol) to indicate the equilibrium price of a ton of soybeans and the equilibrium quantity of soybeans in Colombia in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium.

Based on the previous graph, total surplus in the absence of international trade is

The following graph shows the same domestic demand and supply curves for soybeans in Colombia. Suppose that the Colombian government changes its international trade policy to allow free trade in soybeans. The horizontal black line (PWPW) represents the world price of soybeans at $350 per ton. Assume that Colombia's entry into the world market for soybeans has no effect on the world price and there are no transportation or transaction costs associated with international trade in soybeans. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.

Use the green triangle (triangle symbol) to shade consumer surplus, and then use the purple triangle (diamond symbol) to shade producer surplus.

When Colombia allows free trade of soybeans, the price of a ton of soybeans in Colombia will be $350. At this price,

tons of soybeans will be demanded in Colombia, and

tons will be supplied by domestic suppliers. Therefore, Colombia will export

tons of soybeans.

Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.

	Without Free Trade	With Free Trade
(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus

When Colombia allows free trade, the country's consumer surplus by

, and producer surplus by

. So, the net effect of international trade on Colombia's total surplus is a of

(?
Domestic Demand
Domestic Supply
380
365
Consumer Surplus
350
P
W
335
320
Producer Surplus
305
290
275
260
245
230
25
50
75
100
125
150
175
200
225
250
QUANTITY (Tons of soybeans)
PRICE (Dollars per ton)

(?
380
Domestic Demand
Domestic Supply
365
Equilibrium without Trade
350
335
320
Consumer Surplus
305
290
Producer Surplus
275
260
245
230
25
50
75
100
125
150
175
200
225
250
QUANTITY (Tons of soybeans)
PRICE (Dollars per ton)

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