1. Welfare effects of free trade in an exporting countryConsider the New Zealand market for lemons.The following graph shows the domestic demand and domestic supply curves for lemons in New Zealand. Suppose New Zealand's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a tonne of lemons and the equilibrium quantity of lemons in New Zealand in the absence of international trade. Then, use the green point (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium. NOTE: for the drop down question. the optionfs for first 2 are (increases or decreases), and the last drop down question is (loss or gain) The following graph shows the same domestic demand and supply curves for lemons in New Zealand. Suppose that the New Zealand governmentchanges its international trade policy to allovw free trade in lemons. The horizontal black line (Pw) represents the world price of lemons at $800 pertonne. Assume that New Zealand's entry into the world market for lemons has no effect on the world price and there are no transportation ortransaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possiblebefore any exporting or importing takes place.Use the green point (triangle symbol) to shade consumer surplus, and then use the purple point (diamond symbol) to shade producer surplus.Domestic Supply1100Domestic Demand1000Consumer Surplus900B00700Producer Surplus60050040030020010035 70105140175210245 280315350QUANTITY (Tonnes of lemons)When New Zealand allows free trade of lemons, the price of a tonne of lemons in New Zealand will be $800. At this price,tonnes oflemons will be demanded in New Zealand, andtonnes will be supplied by domestic suppliers. Therefore, New Zealand will exporttonnes of lemons.Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.Without Free TradeWith Free Trade(Dollars)(Dollars)Consumer SurplusProducer SurplusWhen New Zealand allows free trade, the country's consumer surplusby Sand producer surplusby s. So, the net effect of international trade on New Zealand's total surplus is aof%2$PRICE (Dollars per tonne) Consider the New Zealand market for lemons.The following graph shows the domestic demand and domestic supply curves for lemons in New Zealand. Suppose New Zealand's governmentcurrently does not allow international trade in lemons.Use the black point (plus symbol) to indicate the equilibrium price of a tonne of lemons and the equilibrium quantity of lemons in New Zealand in theabsence of international trade. Then, use the green point (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally,use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium.Domestic Supply1100Domestic Demand1000Equilibrium without Trade900800 +700Consumer Surplus600500Producer Surplus4003002001003570105140175210245280315350QUANTITY (Tonnes of lemons)Based on the previous graph, total surplus in the absence of international trade is SPRICE (Dollars per tonne)

Question

1. Welfare effects of free trade in an exporting countryConsider the New Zealand market for lemons.The following graph shows the domestic demand and domestic supply curves for lemons in New Zealand. Suppose New Zealand's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a tonne of lemons and the equilibrium quantity of lemons in New Zealand in the absence of international trade. Then, use the green point (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium. NOTE: for the drop down question. the optionfs for first 2 are (increases or decreases), and the last drop down question is (loss or gain) The following graph shows the same domestic demand and supply curves for lemons in New Zealand. Suppose that the New Zealand governmentchanges its international trade policy to allovw free trade in lemons. The horizontal black line (Pw) represents the world price of lemons at $800 pertonne. Assume that New Zealand's entry into the world market for lemons has no effect on the world price and there are no transportation ortransaction costs associated with international trade in lemons. Also assume that domestic suppliers will satisfy domestic demand as much as possiblebefore any exporting or importing takes place.Use the green point (triangle symbol) to shade consumer surplus, and then use the purple point (diamond symbol) to shade producer surplus.Domestic Supply1100Domestic Demand1000Consumer Surplus900B00700Producer Surplus60050040030020010035 70105140175210245 280315350QUANTITY (Tonnes of lemons)When New Zealand allows free trade of lemons, the price of a tonne of lemons in New Zealand will be $800. At this price,tonnes oflemons will be demanded in New Zealand, andtonnes will be supplied by domestic suppliers. Therefore, New Zealand will exporttonnes of lemons.Using the information from the previous tasks, complete the following table to analyze the welfare effect of allowing free trade.Without Free TradeWith Free Trade(Dollars)(Dollars)Consumer SurplusProducer SurplusWhen New Zealand allows free trade, the country's consumer surplusby Sand producer surplusby s. So, the net effect of international trade on New Zealand's total surplus is aof%2$PRICE (Dollars per tonne) Consider the New Zealand market for lemons.The following graph shows the domestic demand and domestic supply curves for lemons in New Zealand. Suppose New Zealand's governmentcurrently does not allow international trade in lemons.Use the black point (plus symbol) to indicate the equilibrium price of a tonne of lemons and the equilibrium quantity of lemons in New Zealand in theabsence of international trade. Then, use the green point (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally,use the purple point (diamond symbol) to shade the area representing producer surplus in equilibrium.Domestic Supply1100Domestic Demand1000Equilibrium without Trade900800 +700Consumer Surplus600500Producer Surplus4003002001003570105140175210245280315350QUANTITY (Tonnes of lemons)Based on the previous graph, total surplus in the absence of international trade is SPRICE (Dollars per tonne)

Accepted Answer

Equilibrium is achieved at the output level where Qs equals Qd.