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The demand and supply of cars in Country A are given by the following equations:

Demand equation: Qd= 20-2P
Supply equation: Qs= -10+2P
Both Q and P are in tens of thousands
Plot demand & supply curve for cars in the domestic market of Country A
Assume that there is no international trade, find the equilibrium price and quantity for cars in the domestic market of Country A.
Suppose the market opens up to international trade and the world price is $9 (in tens of thousands), find the equilibrium quantity in Country A.
With international trade, is Country A a net exporter or a net importer in the international trade? How much is the export or the import?
How will the shift from no trade to trade impact consumers? Producers? The entire economy? Use the supply-demand diagram in a) to help explain your answers.

asked
User Apekshit
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1 Answer

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The demand and supply equations for the car market in Country A are given as:Qd= 20-2P Qs= -10+2PWhere Q is the quantity of cars demanded or supplied in tens of thousands and P is the price of cars in tens of thousands.Plotting the demand and supply curve for the car market in Country A:The equilibrium price and quantity can be found by equating the quantity demanded and the quantity supplied.20-2P = -10+2P ⇒ 4P = 30P = 7.5Equilibrium quantity:Q = 20 - 2P = 20 - 2(7.5) = 5 thousand cars.The equilibrium price and quantity for the domestic market in Country A are $7.5 and 5 thousand cars, respectively. Suppose the world price for cars is $9, and the market opens up to international trade. In this case, the new equilibrium quantity demanded and supplied would be as follows:Qd = 20 - 2P = 20 - 2(9) = 2Qs = -10 + 2P = -10 + 2(9) = 8The world price is higher than the equilibrium price in Country A, so producers in Country A would export cars, while consumers in Country A would import cars. Therefore, Country A is a net exporter, and the export quantity is 3 thousand cars (the difference between the equilibrium quantity in Country A and the new quantity supplied at the world price).The shift from no trade to trade would benefit producers in Country A as they would be able to sell cars at a higher price and thus increase their profits. However, consumers in Country A would suffer as they would have to pay a higher price for cars. The entire economy would benefit from international trade, as it would allow for specialization, leading to an increase in output and consumption.The following diagram shows the effect of the shift from no trade to trade:

answered
User Roshan Posakya
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8.1k points
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