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01:220:300:01 INTERNATIONAL ECON Qz04: Trade barriers

Single choice

Suppose that the equations S = 2P and D = 6 – P represent a small country's home supply and home demand curves. If the world price is $1, which of the following is the increase in the country's welfare when it trades compared with autarky?

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First, restate what the question provides and what is being compared. The domestic country has the supply function S = 2P and the demand function D = 6 − P. Under autarky (no trade), the world price is not applicable; with trade, the given world price is P_world = 1, and we compare welfare (consumer plus producer surplus) between autarky and trading. Step 1: Find autarky equilibrium and welfare. - Autarky occurs where S = D: 2P = 6 − P, so 3P = 6 and P_autarky = 2. - Quantity traded (autark......Login to view full explanation

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