Answer to Question #67885 in Microeconomics for Fhumudzani Tshitangano

Question

Before trade, the domestic equilibrium price of sugar in Zimbabwe was R10 per Kg and that for South Africa R 15 per Kg. Assume South Africa only trade with Zimbabwe and the transport cost does not exist.
 Using diagrams, explain which country becomes an exporter or an importer when trade is allowed between the two countries. Identify the pre-trade consumer and producer surplus for each country.
 If free trade is permitted, illustrate the change in the surplus of consumers and producers for each country. Will each country’ total surplus increase or decrease?
 Truck drivers who cart goods across these two countries go on a short strike Analyze how this strike may affect the free trade consumer and producer surplus enjoyed by both countries

Answer 1

Before trade, the domestic equilibrium price of sugar in Zimbabwe was R10 per Kg and that for South Africa R15 per Kg.
So, Zimbabwe becomes an exporter and South Africa becomes an importer when trade is allowed between the two countries.
The pre­trade consumer surplus is lower and producer surplus is higher in South Africa and consumer surplus is the same and producer surplus is lower in Zimbabwe.
So, total surplus in both countries will increase after the free trade.
The strike may decrease the free trade consumer and producer surplus enjoyed by both countries.