Economics 101Summer 2009Answers to Homework #2Due June 2, 20091. The market for bicycles in Eastland, a small closed economy, can currently be described by the following domestic demand and domestic supply curves:Domestic Demand: P = 1000 - QDomestic Supply: P = 4Qa. What are the equilibrium price and the equilibrium quantity in this market?
b. What is the value of consumer surplus in this market?
c. What is the value of producer surplus in this market?
d. If Eastland opens to trade, will it import or export bicycles? Explain your answer.
e. Provide a numerical measure for your answer in part (d).
f. When Eastland opens to trade, what is the value of consumer surplus?
g. When Eastland opens to trade, what is the value of producer surplus?
h. Compare Eastland's total surplus as a closed economy with its total surplus as an open economy. What is the change in total surplus it receives when it opens its economy?
i. Given that trade increases total surplus why might Eastland adhere to a closed economypolicy?
2. Eastland's domestic demand and domestic supply curves for bicycles are the equations given in problem (1). In addition, the world price of bicycles is $500. Suppose Eastland has decided to open the bicycle market up to trade, but the government has approved a quota limit of 200 imported bicycles. a. Given this quota, what will the price of bicycles be in Eastland?1