Principles Of Microeconomics Assignment

Principles Of Microeconomics Assignment

ECON 2 – Principles of Microeconomics Signature: Drake University, Fall 2019 William M. Boal

Printed name:

HOMEWORK EXERCISE #6 “International Trade”

Due Friday, October 4, 2019 Suppose the United States and Europe have the following demand and supply curves for wheat.

(1) [Autarky: 20 pts] First suppose that the United States and Europe do not engage in international trade. (The absence of international trade is called “autarky.”) In each graph, draw a horizontal line at the equilibrium price. Then compute the following for each country.

United States Europe a. Equilibrium price.

$ $

b. Equilibrium quantity.

million million

c. Consumer surplus.

$ million $ million

d. Producer surplus.

$ million $ million

e. Total surplus.

$ million $ million

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

P ri ce

Quantity (millions)

United States

Demand Supply

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

0 1 2 3 4 5 6 7 8 9 10

P ri ce

Quantity (millions)

Europe

Demand Supply

ECON 2 – Principles of Microeconomics Drake University, Fall 2019

Homework Exercise #6 Page 2 of 3

(2) [Effects of international trade: 44 pts] Now suppose the United States and Europe engage in international trade in wheat.

a. [24 pts] Using the graphs above, find the quantity demanded and the quantity supplied in each country. Then compute the combined quantity demanded and the combined quantity supplied.

United States Europe Combined Market Price Quantity

demanded Quantity supplied

Quantity demanded

Quantity supplied

Quantity demanded

Quantity supplied

$2 million million million million million million $3 million million million million million million $4 million million million million million million $5 million million million million million million $6 million million million million million million $7 million million million million million million

b. [10 pts] Use your calculations to plot and label carefully the combined demand and supply curves. Note: They should be smooth curves, not stairsteps, because the quantities are in millions.

c. [2 pts] What is the international equilibrium price?

$

d. [2 pts] Did the price of wheat in the U.S. increase or decrease as a result of international trade?

e. [2 pts] Did the price of wheat in Europe increase or decrease as a result of international trade?

f. [2 pts] Which country will now export wheat?

g. [2 pts] How much will it export?

million

$0

$1

$2

$3

$4

$5

$6

$7

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

P ri ce

Quantity (millions)

Combined Market

ECON 2 – Principles of Microeconomics Drake University, Fall 2019

Homework Exercise #6 Page 3 of 3

(3) [Welfare analysis: 24 pts] In the graphs on the first page, draw horizontal lines at the international equilibrium price you found in (2c). Then use the graphs on the first page to answer the following questions for each country.

United States Europe a. Does consumer surplus increase or decrease as a result

of international trade?

b. By how much?

$ million $ million

c. Does producer surplus increase or decrease as a result of international trade?

d. By how much?

$ million $ million

e. Does total surplus (or total welfare) increase or decrease as a result of international trade?

f. By how much?

$ million $ million

(4) [Conclusions: 12 pts] Answer the following questions based on your calculations for question (3) above.

a. Some people believe that international trade is necessarily a “zero-sum game.” That is, they believe that if one country enjoys an increase in total surplus from international trade, the other country suffers a decrease in total surplus of equal size. Based on this example, do you agree? Why or why not? (Answers that are identical or nearly identical to another student’s will receive zero points.)

Suppose European farmers urge their governments to ban wheat imports and go back to autarky. They say that “Europe should put Europe first.” Look at the changes in Europe’s consumer and producer surplus that you calculated in question (3) above. Then answer the following three questions. (Answers that are identical or nearly identical to another student’s will receive zero points.)

b. Would a ban on wheat imports into Europe benefit European farmers? Why or why not?

c. Would such a ban benefit European consumers? Why or why not?

d. Would such a ban benefit Europe as a whole—that is, would it pass the compensation test? Why or why not?

[end of exercise]

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