Consider the market for meekers in the imaginary economy of Meekertown. In the a
ID: 1221136 • Letter: C
Question
Consider the market for meekers in the imaginary economy of Meekertown. In the absence of international trade, the domestic price of a meeker is $32. Suppose that the world price for a meeker is $24. Assume that Meekertown is too small to influence the world price for meekers once they enter the international market.
1. If Meekertown allows free trade, then it will _____ meekers. (export/import)
Given current economic conditions in Meekertown, complete the following table by indicating whether each of the statements is true or false.
2. Meekertownian consumers are better off under free trade than they were before.
3.Meekertownian producers are better off under free trade than they were before.
True or False: When a country is too small to affect the world price, allowing for free trade will never increase total surplus in that country, regardless of whether it imports or exports as a result of international trade.
True
False
Explanation / Answer
1.If Meekertown allows free trade,then it will import meekers.
Since meekertown is too small to influence prices therefore when the economy opens up,
the world prices being more cheaper wil make domestic meeker more expensive.As a result
consumers will shift to importing meekers.
2. Meekertownian consumers are better off under free trade than they were before.The statement is true.
Since the world prices are lower than domestic prices,consumers benefit from this deal
3.Meekertownian producers are better off under free trade than they were before.This statement is False.
This is so because before trade the domestic producers were able to capture all the market.Since they are
too small to affect world prices, when the economy opens up all consumers would end up importing meekers
thus hurting the domestic producers.
The statement is False.
Since opening up an economy leads to changes in producer and consumer surplus, if the
increase in consumer surplus is more than decrease in producer surplus then the total surplus in the economy would increase.