Please take a look at question 2. I already solved problem 1. 1. Suppose that th
ID: 1144203 • Letter: P
Question
Please take a look at question 2. I already solved problem 1.
1. Suppose that the demand for a good in a country is given by D- 40-p, and its supply is S-p, where p is the market price (a) In a simple diagram (with quantity on the horizontal axis and price on the vertical axis), show graphically the demand and supply curves. (b) What is the export supply function of the good? (c) What is the import demand function of the good? (d) Determine the autarkic price of the good (i.e., when E -0). (e) In a separate diagram (with export/import on the horizontal axis and price on the vertical price), show graphically the export supply curve 2. Consider again the market described in question 1. Call this country the home country. Suppose that there exists a foreign country whose export supply function of the good is E* 4pr_ 20, where an asterisk represents a foreign variable (a) Determine the autarkic price of the foreign country. Compare this autarkic price with that of the home country. In which country is the good cheaper before trade? (b) Free trade with zero transport cost is allowed between these two countries Explain why under equilibrium p-p*. Determine the free-trade equilibrium price and the corresponding export (or import) of the good by each country. Verify that your results are consistent with what the lecture notes (Section 1.5) predict.Explanation / Answer
a).
Consider the given problem here “export supply” function of “foreign” country is “E* = 4P* - 20”. So, as we know that at the “autarkic” situation country’s export=import=0, => by putting E*=0, we will get the “autarkic price” of "Foreign country".
=> E* = 4P* - 20, => 4P* = 20, => P* = 20/4 = 5, =>P*=5.
So, “foreign” country’s autarkic price is “P*=5”.
Now, the “Home” country’s autarkic price is “P=20 > P*”, (by equating the home “demand” and “supply” function).
So, since P*=5 < P=20, => in “Foreign” country the good is cheaper compared to the “Home” country.
b).
Now, “home” country’s demand function be, “D=40-P” and supply function is “S=P”, => the import demand function is “D - S", => 40 – P – P = 40 – 2P, => M = 40 – 2P.
So, the free trade equilibrium price will be determined by the intersection of “M” and “E*”.
So, we will get the free trade price by equating “M” and “E*”.
=> 40 – 2P = 4P* - 20, here P=P*, => 40 + 20 = 6P, => 6P = 60, => P = 60/6 =10, =>P=P*=10.
So, after trade the “free trade” price is “P=P*=10” and at P*=10, E*=20. So, “Foreign” country will export “20units” of the good to the “Home country”, in other ward “Home” country will import the good from the “foreign” country by the same amount.