Chapter 5, Problem 5P

To determine

Concept Introduction:

World Price: It is the equilibrium price at which export demand curve intersects import supply curve. It is equilibrium price with trade.

Domestic Demand Curve: The curve which shows how the quantity demanded by changes due to change in the price when there is no trade. It is negatively sloped curve.

Domestic Supply Curve: The curve which shows how the quantity supplied changes due to change in the price when there is no trade. It is positively sloped curve.

Tariff: It imposes restriction on the goods that are imported. It is an indirect tax levied on the goods in case of import and export.

Consumer Surplus: It is difference between the amount that a consumer wants to pay and the real amount which he pays for goods and services.

Producer Surplus: It is difference between the amount which the producer wants to receive and the real amount which he receives for goods and services.

Answer to Problem 5P

a. Effect of trade of tomatoes on U.S and Mexican consumer.

Fig 1

Fig 2

Explanation of Solution

U.S. Consumer

• In the figure 1 the equilibrium without trade is at point A where domestic price and quantity of tomato is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.and U.S imports the deficit from Mexico.

• Due to import, the price has decreased in U.S and the consumer surplus has increased by the shaded area equal to

Mexican Consumer

• In the figure 2 the equilibrium without trade is at point A where domestic price and quantity of tomato is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.and Mexico exports the surplus to U.S.

• Due to export the price has increased in Mexico and the consumer surplus has decreased by the shaded area equal to

b. Effect of trade of tomatoes on U.S and Mexican producer.

Fig 3

Fig 4

U.S. Producer

• In the figure 3 the equilibrium without trade is at point A where domestic price and quantity of tomato is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.and U.S imports the deficit from Mexico.

• Due to import the price has decreased in U.S and the producer surplus has decreased by the shaded area equal to (X).

Mexican Producer

• In the figure 4, the equilibrium without trade is at point A where domestic price and quantity of tomato is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.So, Mexico exports the surplus to U.S.

• Due to export the price has increased in Mexico and the producer surplus has decreased by the shaded area equal to

c. Effect of trade on Mexican and U.S tomato workers.

Tomato workers in U.S are negatively affected but the workers in Mexico will benefit.

• Due to international trade, U.S. imports tomatoes. As a result, the demand for domestic potatoes decreases and the wage of U.S. workers who are involved in the production of tomatoes decreases.

• Due to international trade Mexico exports tomatoes. As a result, the demand for domestic potatoes increases and the wage of Mexican workers who are involved in the production of tomatoes increases.

d. Effect of trade of poultry on U.S and Mexican consumer.

Fig 5

Fig 6

Mexican Consumer:

• In the figure 5, the equilibrium without trade is at point A where domestic price and quantity of poultry is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.and Mexico imports the deficit from U.S.

• Due to import of poultry the price has decreased in Mexico and the consumer surplus has increased by the shaded area equal to

U.S. Consumer

• In the figure 6, the equilibrium without trade is at point A where domestic price and quantity of poultry is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S,and. U.S exports the surplus to Mexico.

• Due to export the price has increased in U.S. As a result, the consumer surplus has decreased by the shaded area equal to

e. Effect of trade of poultry on U.S and Mexican producer.

Fig 7

Fig 8

Mexican Producer

• In the figure 7 the equilibrium without trade is at point A where domestic price and quantity of poultry is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.and Mexico imports the deficit from U.S.

• Due to import of poultry the price has decreased in Mexico and the producer surplus has decreased by the shaded area equal to

U.S. Producer

• In the figure 8, the equilibrium without trade is at point A where domestic price and quantity of poultry is P_Aand Q_Arespectively. The world price is P_W. The quantity demanded at world price is Q_Dand the quantity supplied at the world price is Q_S.and U.S exports the surplus to Mexico.

• Due to export the price has increased in U.S and the producer surplus has increased by the shaded area equal to

f. Effect of trade on Mexican and U.S poultry workers.

Poultry workers in Mexico are negatively affected but workers in USA are will benefit.

• Due to international trade U.S. exports poultry to Mexico. As a result the demand for domestic poultry increases in the world market so, the wage of U.S. workers who are involved in the poultry farming increases.

• Due to international trade Mexico imports poultry from U.S. As a result the demand for domestic poultry decreases so, the wage of Mexican workers who are involved in the poultry farming decreases.