Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Consider the Kenyan market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently
Consider the Kenyan market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in Kenya in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium. (9 900 Domestic Demand Domestic Supply - II- 850 ' 800 EqUIIIbnum Without Trade 750 h A C .9 a, 700 Consumer Surplus D. E g 650 $0 0 E 8 60 Producer Surplus E n- 550 500 450 400 o 20 40 so 80 100 120 140 160 130 200 QUANTITY (Tons of lemons) Based on the previous graph, total surplus in the absence of international trade is $ . The following graph shows the same domestic demand and supply curves for lemons in Kenya. Suppose that the Kenyan government changes its international trade policy to allow free trade in lemons. The horizontal black line (PW) represents the world price of lemons at $800 per ton. Assume that Kenya's entry into the world market for lemons has no effect on the world price and there are no transportation or transaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place. Use the green triangle (triangle symbol) to shade consumer surplus, and then use the purple triangle (diamond symbol) to shade producer surplus. 900 Domestic Demand Domestic Supply Consumer Surplus 8-0 Producer Surplus 850 - 800 750 700 650 600 PRICE (Dollars per ton) 550 500 - 450 - 400 0 20 40 so 80 100 120 140 180 130 200 QUANTITY (Tons of lemons) When Kenya allows free trade of lemons, the price of a ton of lemons in Kenya will be $800. At this price, |:] tons of lemons will be demanded in Kenya, and |:] tons will be supplied by domestic suppliers. Therefore, Kenya will export |:| tons of lemons. Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade. Without Free Trade With Free Trade (Dollars) (Dollars) Consumer Surplus Producer Surplus When Kenya allows free trade, the country's consumer surplus V by , and producer surplus V by . So, the net effect of international trade on Kenya's total surplus is a v of_
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started