Question
Assume Home's supply and demand for wheat is: P = 10 - (1/20)QD P = 4 + (1/20)QS a. [4 points] Derive and graph Home's
Assume Home's supply and demand for wheat is:
P = 10 - (1/20)QD
P = 4 + (1/20)QS
a. [4 points] Derive and graph Home's import demand schedule. What is the price of wheat in the absence of trade?
b. [4 points] Now add Foreign, with the following demand and supply schedules:
P(Foreign) = 8 - (1/20)Q* D
P(Foreign) = 2 + (1/20)Q* S
Derive and graph (in a new figure) Foreign's export supply schedule and calculate the price of wheat that would prevail in Foreign in the absence of trade.
c. [6 points] Now allow Foreign and Home to trade with each other, at zero transportation cost. Find and graph the equilibrium under free trade. What is the world price and the volume of trade? What is the quantity of wheat supplied and demanded in the home country under free trade?
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