Effects of the liberalization of international trade for an importable product.

1.Initial equilibrium without imports: the equilibrium price is USD 50 thousands per ton and equilibrium quantity is 1.000 ton per month. Domestic demand function is q = 2,000 - 20p (in tons per month) and domestic supply function is q = -250 + 25p (in tons per month).

a) According with this, please demonstrate mathematical equation of demand from 1., where its price elasticity (e) is equals to -1 and (2) from known consumption point q = 1,000 and p = 50. Assume (3) demand is straight and (4) elasticity is at known demand point (p,q) = (50, 1,000).

b) Demonstrate mathematical equation of supply from (1), where its price elasticity point (e) is equal to +1.25, and (2) from known supply point. Assume that (3) supply is straight too and (4) elasticity is at known supply point (p,q) = (50, 1,000)

Schematically plot initial equilibrium with supply and demand, paint areas of both consumer surplus and producer surplus.

Final equilibrium with imports: now, analyze effect of free import products, which turns out to be at the import parity price of USD 20 thousand by tons.

2.Indicate what function changes, (1) domestic demand and/or (2) domestic supply?

3.Indicate for each identified change if an increase or a decrease exists.

4.Plot again, marking both initial (no imports) and final (with imports) prices and quantities. On your graph, point out: a) area of change in consumer surplus and b) area of change in producer surplus.

5. Calculate domestic demanded quantity at price p = USD 20 thousand by ton.

6. Indicate if change of consumer surplus is a gain or a loss for domestic consumers.

7. Calculate domestic offered quantity at price p = USD 20 thousand by ton.

8. Indicate if change of producer surplus is a gain or a loss for domestic producers.

9. Calculate imported quantity at price p = USD 20 thousands by ton.

10. Indicate: a) if gain exceeds loss (net gain) or loss exceeds gain (net loss). Please, consider net effect = consumer surplus variation + producer surplus variation, where each change in surplus with its sign. On the above graph, plot area of net effect.

11. Calculate net social or loss social (net effect = consumer surplus variation + producer surplus variation) as area of a triangle.