Prob_Set__2___Fall_2007

# Prob_Set__2___Fall_2007 - AEM/ECON 230 International Trade...

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AEM/ECON 230 Prof. David Lee International Trade and Finance Fall 2007 Problem Set #2 Question 1: Gains from Trade [40 points] An economist from the United States Department of Agriculture (USDA) collected the following information on the sugar markets in the U.S. and in the rest of the world (ROW): Supply and demand curves are linear in both the U.S. and the ROW. At prices 20 \$ 1 = P per ton and 30 \$ 2 = P per ton, the quantities demanded and supplied in each market are indicated in Table I: Table I: Supply and Demand for Sugar for Selected Price Levels (US and ROW) United States Rest of the World (ROW) Price (\$ per ton) Demand (tons) Supply (tons) Demand (tons) Supply (tons) 20 1 = P 40 1 = US D 10 1 = US S 25 1 = ROW D 60 1 = ROW S 30 2 = P 30 2 = US D 15 2 = US S 20 2 = ROW D 90 2 = ROW S (a) Derive the demand and supply equations for each market (U.S. and ROW). [4 points] (b) Determine the autarky equilibrium price and quantity in the U.S. and in the ROW. [4 points]

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(c) Calculate the consumer surplus (CS) and the producer surplus (PS) under autarky in each market ( Hint: Graphs may be helpful). [6 points] (d) Suppose that the U.S. and the ROW engage in free trade in sugar. Determine the world free trade equilibrium price and quantity traded ( Hint: first determine the equations for ES and ED ). Assume that the U.S. and the ROW are large countries. [6 points] (e) Use a 3-panel graph (ROW, World, U.S.) to illustrate the free trade supply and demand schedules in each market. Clearly label supply and demand curves for each country, as well as excess supply and excess demand curves in the international market. [6 points]
(f) Determine the total amount of sugar produced, consumed, exported and imported by the U.S. and the ROW under free trade. [8 points] (g) Calculate the net welfare gains from free trade in each market (U.S., ROW and

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• Fall '07
• LEE

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