Question

Include correctly labeled diagrams, if useful or required, in explaining your answers. Show work.


In the small country of AgroIsland the equilibrium price of wheat is $10 per bushel Wheat is produced in a competitive industry The world market price of wheat is $20 per bushel


(a) Assume that AgroIsland currently does not engage in international trade Draw a correctly labeled graph illustrate the market for wheat


The equilibrium price labeled $10


The equilibrium quantity labeled Q


The domestic producer surplus shaded completely and labeled PS


(b) On the graph show


The world price of a bushel of wheat labeled $20


The quantity of wheat supplied by domestic producers labeled QP


The domestic consumer surplus after trade shaded completely and labeled CS


(b)how does each of the following change if AgroIsland engages in international trade in the wheat market


The domestic consumer surplus


The domestic producer surplus

Answer 1

(a) Demand and supply curve will intersect at P = $10 and Q.

The producer surplus is a triangle between P = $10 and the supply curve.

(b) If the country starts to trade internationally, then P = $20, QP > Q, QS < Q.

CS is a triangle between P = $20 and the demand curve.

The domestic consumer surplus will decrease.

The domestic producer surplus will increase.