CHAPTER 7.1) Market for computers in Canada is illustrated with the graph shown
ID: 1124586 • Letter: C
Question
CHAPTER 7.1) Market for computers in Canada is illustrated with the graph shown below. Market for Computers 3000 2750 2500 2250 2000 -1750 1500 2 1250 1000 750 500 250 0 2 4 6 8 10 12 14 16 18 20 22 24 millions a) In the absence of trade (also known as the state of autarky), what is the equilibrium price of a computer in Canada and how many computers are b) Calculate the consumer surplus, producer surplus and total surplus at the c) Suppose that trading is a possibility and the world price for a computer is $1250. d) How many computers are produced by Canadian producers with trade? How consumed in Canada? market equilibrium What would be the new price of a computer with trade? many computers are consumed by Canadian consumers with trade? What would happen to the excess demand for computers? e) Calculate the consumer surplus, producer surplus and total surplus at the market equilibrium with trade.Explanation / Answer
a) In the autarky situation, the price of the computer is $1750 and at that price, the demand for the computer is 8 million.
b) FOr calculating consumer surplus we will use 1/2 x base x height. The base of the triangle here is the price and height is the quantity sold.
COnsumer surplus = 1/2 x 1000 x 8
=4000.
Producer surplus = 1/2 x 1000 x 8 (At equilibrium price the producer surplus and consumer surplus is same here.)
= 4000.
Total surplus = 4000 + 4000 = 8000.
c) After the trade, the new price of the computer will be $1250 because that is the world price of the computer.
d) After trade Canadians are producing only 4 million computers. And the demand is 12 million. The excess demand will be imported from the world market.
e) With trade, the consumer surplus will be
= 1/2 x 1500 x 12
= 9000.
Producer surplus will be
= 1/2 x 500 x 4
= 1000.
Total surplus will be 9000 + 1000 = 10,000.
.