The following graph shows the same domestic demand and supply curves for lemons in Bolivia. Suppose that the Bolivian government changes its international trade policy to allow free trade in lemons. The horizontal black line (PWPW) represents the world price of lemons at $800 per tonne. Assume that Bolivia's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. Use the green point (triangle symbol) to shade consumer surplus, and then use the purple point (diamond symbol) to shade producer surplus When Bolivia allows free trade of lemons, the price of a tonne of lemons in Bolivia will be $800.
The following graph shows the same domestic demand and supply curves for lemons in Bolivia. Suppose that the Bolivian government changes its international trade policy to allow free trade in lemons. The horizontal black line (PWPW) represents the world price of lemons at $800 per tonne. Assume that Bolivia's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. Use the green point (triangle symbol) to shade consumer surplus, and then use the purple point (diamond symbol) to shade producer surplus When Bolivia allows free trade of lemons, the price of a tonne of lemons in Bolivia will be $800.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1. Welfare effects of free trade in an exporting country
The following graph shows the same domestic demand and supply curves for lemons in Bolivia. Suppose that the Bolivian government changes its international trade policy to allow free trade in lemons. The horizontal black line (PWPW) represents the world price of lemons at $800 per tonne. Assume that Bolivia's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
Use the green point (triangle symbol) to shade consumer surplus , and then use the purple point (diamond symbol) to shade producer surplus
When Bolivia allows free trade of lemons, the price of a tonne of lemons in Bolivia will be $800.
Transcribed Image Text:1100
Domestic Demand
Domestic Supply
1000
Consumer Surplus
900
800
P,
W
700
Producer Surplus
600
500
400
300
200
100
+
35
70
105
140 175
210
245
280
315
350
QUANTITY (Tonnes of lemons)
PRICE (Dollars per tonne)
Transcribed Image Text:When Bolivia allows free trade of lemons, the price of a tonne of lemons in Bolivia will be $800. At this price,
tonnes of lemons will be
demanded in Bolivia, and
tonnes will be supplied by domestic suppliers. Therefore, Bolivia will export
tonnes of lemons.
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 Bolivia allows free trade, the country's consumer surplus
▼ by $
and producer surplus
by
%24
So, the net effect of international trade on Bolivia's total surplus is a
of $
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