Quiz_01__Key_ - EC 340 Spring 2011 Quiz 1 There are two...

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Unformatted text preview: EC 340 Spring 2011 Quiz 1 There are two countries (East and West). The autarky price of cotton is $60 in East and $30 in West. The free‐trade price of cotton is $40, and 100 units of cotton are traded. 1. Draw the import‐demand and export supply curves consistent with this information. 2. Calculate the net welfare gain from trade (compared with autarky) for EAST. 1. 2. Cotton is cheaper in West than it is in East, so West will be the exporter and East will be the importer. The intercept of the import demand curve will be $60 (the price at which East will not want to import any cotton) and the intercept of the export supply curve will be $30 (the price at which West will not want to export any cotton). The two curves will intersect at a price of $40 (the free trade price), corresponding to a quantity of 100 (the quantity of cotton exported by West, which equals the quantity imported by East). P 60 SX 40 DM 30 100 Q The net gain from trade to East (the importing country) equals the area of the green triangle that I shaded in the above diagram. This is ½ * (autarky price – free trade price)*quantity of imports) = ½ * ($60 ‐ $40)* 100 = $1,000. ...
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