You are provided with the demand and supply equations of two countries X and M in...

  

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You are provided with the demand and supply equations of two countries X and M in the world that produce the same good. Presently, the two countries are closed economies and do not engage in any trade with each other. The good in question is a standardized (non- differentiated) good. Country X Px = 20-0.1Q Px = -8 +0.1Q Country M Pm=20-0.1Q Pm = 8 +0.1Q a) Calculate the equilibrium price and quantity for this product that prevails in each country. Which of the two countries is the low-cost producer? b) In two separate diagrams draw the demand and supply curves indicating the equilibrium P and Q. Draw the two diagrams side by side using the same scale. c) Calculate the Consumer (CS) and producer (PS) surplus and the total Social Welfare (SW) for each country. Now, suppose that the two countries have decided to open themselves up to free trade with each other. Suppose that given the sum of their demand and supply curves, assuming zero transportation costs, that the world demand and supply equations are given by World: Pw=20-0.05Q and P=0+ 0.05Q d) Calculate the equilibrium world price and quantity for this product that will prevail once the two countries have settled in their open trade relationship with each other. e) At the new world price (Pw) calculate what will happen to the quantity demanded (Qa) and quantity supplied (Qs) in each country. Which country will become the exporter (have a surplus) and which the importer (have a shortage) of this good? Calculate the amount of the good exported by one and imported by the other country. It will help you if you draw on your two diagrams the new price and pinpoint graphically the new quantities demanded and supplied in each country. f) Calculate the new Consumer (CS) and producer (PS') surplus and the total Social Welfare (SW') for each country now that they have opened up to trade. g) What has been the change on the CS, PS and SW in the exporting country? Who gains and who loses (consumers or producers)? Is the country as a whole better or worse off? h) What has been the change on the CS, PS and SW in the importing country? Who gains and who loses (consumers or producers)? Is the country as a whole better or worse off? i) What is the change in the World Social Welfare (WSW SWx+ SWm). Are both countries together in a better or worse position than before? You are provided with the demand and supply equations of two countries X and M in the world that produce the same good. Presently, the two countries are closed economies and do not engage in any trade with each other. The good in question is a standardized (non- differentiated) good. Country X Px = 20-0.1Q Px = -8 +0.1Q Country M Pm=20-0.1Q Pm = 8 +0.1Q a) Calculate the equilibrium price and quantity for this product that prevails in each country. Which of the two countries is the low-cost producer? b) In two separate diagrams draw the demand and supply curves indicating the equilibrium P and Q. Draw the two diagrams side by side using the same scale. c) Calculate the Consumer (CS) and producer (PS) surplus and the total Social Welfare (SW) for each country. Now, suppose that the two countries have decided to open themselves up to free trade with each other. Suppose that given the sum of their demand and supply curves, assuming zero transportation costs, that the world demand and supply equations are given by World: Pw=20-0.05Q and P=0+ 0.05Q d) Calculate the equilibrium world price and quantity for this product that will prevail once the two countries have settled in their open trade relationship with each other. e) At the new world price (Pw) calculate what will happen to the quantity demanded (Qa) and quantity supplied (Qs) in each country. Which country will become the exporter (have a surplus) and which the importer (have a shortage) of this good? Calculate the amount of the good exported by one and imported by the other country. It will help you if you draw on your two diagrams the new price and pinpoint graphically the new quantities demanded and supplied in each country. f) Calculate the new Consumer (CS) and producer (PS') surplus and the total Social Welfare (SW') for each country now that they have opened up to trade. g) What has been the change on the CS, PS and SW in the exporting country? Who gains and who loses (consumers or producers)? Is the country as a whole better or worse off? h) What has been the change on the CS, PS and SW in the importing country? Who gains and who loses (consumers or producers)? Is the country as a whole better or worse off? i) What is the change in the World Social Welfare (WSW SWx+ SWm). Are both countries together in a better or worse position than before?

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