Question

1. Welfare effects of free trade in an exporting country Consider the Kenyan market for lemons. The following graph shows the domestic demand and domestic supply curves for lemons in Kenya. Suppose Kenya's government currently does not allow international trade in lemons. Use the black point (plus symbol) to indicate the equilibrium price of a ton of lemons and the equilibrium quantity of lemons in Kenya in the absence of international trade. Then, use the green triangle (triangle symbol) to shade the area representing consumer surplus in equilibrium. Finally, use the purple triangle (diamond symbol) to shade the area representing producer surplus in equilibrium. 920Domestic Demand Domestic Supply ks) Equilibrium without Trade 800 740 2 680 Consumer Surplus C 620 C2 Ш 560 CO fr. Producer Surplus 500T 440 380 320 --+ 0 45 90 135 180 225 270 315 360 405 450 QUANTITY (Tons of lemons) When Kenya allows free trade, the country's consumer surplus (Increase/ Decrease) by $__________, and producer surplus (Decrease/Increase) by $_____. So, the net effect of international trade on Kenya's total surplus is a (Gain/Loss) of $___________.

Answer 1

The Total surplus in the absence of International Trade will be 67500 dollar.The graph is given below.now in case of free trade of lemons

now when kenya allows free trade of lemons then at price 800 $ , 90 tons lemons will be demanded domestically and suppliers will supply 360 tons of lemons domestically then 270 tonnes can be exported.

	without free trade	free trade
Consumer surplus	33750	5400
producer surplus	33750	129600

When Kenya allows free trade, the country's consumer surplus ( Decrease) by$ 28350__________, and producer surplus (Increase) by $_95850____. So, the net effect of international trade on Kenya's total surplus is a (Gain) of $____67500_______.