Question at position 5 The graph above shows the demand and supply of vacuum cleaners. The demand for vacuum cleaners is given by: QD = 500 - 5 P. The inverse demand for vacuum cleaners is: P = 100 - 0.2QD. The supply of vacuum cleaners is given by: QS = 2.5P - 100. The inverse supply for vacuum cleaners is: P = 40 + 0.4QS. Which of the area(s) in the graph above represents Gains from Trade? Hint: Gains from trade represent the sum of the benefits to demanders and suppliers.Area AArea BArea A plus Area BArea DArea C

Question

Question at position 5  The graph above shows the demand and supply of vacuum cleaners. The demand for vacuum cleaners is given by: QD = 500 - 5 P. The inverse demand for vacuum cleaners is: P = 100 - 0.2QD. The supply of vacuum cleaners is given by: QS = 2.5P - 100. The inverse supply for vacuum cleaners is: P = 40 + 0.4QS. Which of the area(s) in the graph above represents Gains from Trade? Hint: Gains from trade represent the sum of the benefits to demanders and suppliers.Area AArea BArea A plus Area BArea DArea C

BlackTom AI · Accepted Answer

We start by restating the scenario and options to ensure clarity about what we’re evaluating.
Question: The graph shows demand and supply for vacuum cleaners. The expressions are QD = 500 - 5P and QS = 2.5P - 100, with inverse forms P = 100 - 0.2QD and P = 40 + 0.4QS. Which area(s) on the graph represent Gains from Trade? Options: Area A; Area B; Area A plus Area B; Area D; Area C.

First, recall the key concept: Gains from trade equal the total surplus generated by having a market price and quantity that satisfy both consumers and producers, i.e., the sum of Consumer Surplus (CS) and Producer Surplus (PS) at the equilibrium.
To determine the equilibrium, solve for where demand equals supply: 500 - 5P = 2.5P - 100. This gives 600 = 7.5P, so P* = 80. Substituting back, Q* = 500 - 5(80) = 100.
Now compute the surpluses conceptually to connect to the diagram areas:
- Consumer Surplus (CS) is the area below the demand curve and above the equilibrium price, up to the equilibrium quantity. On a standard price-quantity graph, this forms a triangle whose height is the difference between the maximum price a consumer is willing to pay (the intercept of the demand curve, here 100) and the market price (80), and whose base is the equilibrium quantity (100).
- Producer Surplus (PS) is the area above the supply curve and below the equilibrium price, up to the equilibrium quantity. This is also a triangle, whose height is the difference between the market price (80) and the minimum price at which producers are willing to supply (the intercept of the supply curve, here 40), with base 100.

With these definitions in mind, evaluate each option:
Option Area A: This region sits where the highest willingness to pay by consumers exceeds the market price, forming the upper consumer surplus component. It captures part of the CS area, specifically the portion above price 80 up to the demand curve limit. This aligns with the concept of CS, so Area A contributes to Gains from Trade.
Option Area B: This region lies between the market price and the supply curve for the quantities up to Q*, representing producers’ gains from selling at a price above their minimum acceptable price. This is the producer surplus portion, i.e., PS, contributing to Gains from Trade.
Option Area A plus Area B: Since Area A contributes CS and Area B contributes PS, their sum represents the total (CS + PS) — the Gains from Trade. This combination matches the fundamental definition of gains from trade as the total surplus created by the market outcome.
Option Area D: This region appears to be the area tied to other surplus or deadweight-related components that may be outside the core CS/PS sum under equilibrium, or may reflect a welfare change not captured by the simple CS+PS calculation shown. It does not represent the total Gains from Trade.
Option Area C: This region likely corresponds to a different segment not directly contributing to the CS or PS at the equilibrium, or may reflect welfare areas misaligned with the standard CS or PS definitions. It does not represent Gains from Trade on its own.

In summary, the Gains from Trade in a standard supply-demand diagram correspond to the sum of consumer surplus and producer surplus, i.e., Area A (consumer surplus part) plus Area B (producer surplus part). The other areas do not collectively equal the total surplus generated by trade in this context.

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