Answer to Question #287578 in Microeconomics for tolex

Question

Given that the demand for good X is more elastic in country A than country B while the

supply conditions are the same, answer the following questions.

a) Compare the before trade price of X in country A and B.

b) Which country will be importer of X and which country will be exporter?

c) What will happen to the price of X in country A and country B during the process

of international trade?

d) What does the price change in country A result on quantity demand, quantity

supply of domestic producers, and supply?

e) What does the price change in country B result on quantity demand, quantity

supply of domestic producers, and demand?

Answer 1

Solution:

a.). The before trade price of X in country A is much lower compared to country B since good X is more responsive to a price change in country A than B.

 

b.). Country B will be the importer of X while country B will be the exporter of X. This is because the demand for X in country B is much higher compared to country A which has less demand for the product.

 

c.). International trade affects the prices of consumer goods that are produced and sold in the domestic market. As a result, the price of good X in countries A and B will go down and the good will be much cheaper due to enhanced competition.

d.). If the price of good X increases in country A, the quantity demanded will reduce drastically due to the high sensitivity of the good to price change. The quantity supplied by producers will increase due to the increase in good X price and there will be an excess supply of good X in the market.

e.). If the price of good X increases in country B, the quantity demanded will not change much due to the low sensitivity of the good to price change. The quantity supplied by producers will slightly increase and there will be a moderate supply of good X in the market.