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Consider the Panamanian market for tangerines The following graph shows the domestic demand and domestic supply curves for tangerines in Panama. Suppose Panama's government currently does not allow the international trade of tangerines. Using the black point (X symbol), indicate the equillbrium price of a ton of tangerines and the equilibrium quantity of tangerlines in Panama in the absence of international trade. Dashed drop lines will automatically extend to both axes. Then use the green triangle (triangle symbols) to shade the area representing consumer surplus (CS) in equilibrium. Finally, use the purple triangle (dlamond symbols) to shade the representing producer surplus (PS) in equilibrium. area PRICE IDollars per ton) 440 Before Trade Eqm Domestic Domestic Supply Demand 400 360 CS 320 280 PS 240 200 160 120 8D 40 500 400 100 200 300 Clear All Help QUANTITY IThousands of tons of tangerises million. (Hint: Mouse over any are Based on the prior graph, total welfare in the absence of international trade is eddt.com display its value in thousands of dollars.) Trending on r/aww thaie just docovere The following graph again shows the domestic demand and domestic supply curves for tangerines in Panama. Suppose that the raaaa
million. (Hint: Mouse over any area you shaded to Based on the prior graph, total welfare in the absence of intenational trade is display its value in thousands of dollars.) The following graph again shows the domestic demand and domestic supply curves for tangerines in Panama. Suppose that the Panamanian government changes its international trade policy and Panama now allows free trade in tangerines. The world price of tangerines is \$120 per ton, as shown by the horizontal dashed line. Assume that Panama's entry into the world market for tangerines has no effect on the world price and there are no transportation or transaction costs associated with international trade in tangerines. Also assume that domestic suppliers will satisty domestic demand as much as possible before any exporting or importing takes place. PRICE IDollars per tonl 440 Domestic Supply Domestic Demand 400 360 PS 320 280 240 200 World Price 160 120 80 500 0 300 200 100 Help Clear Al QUANTITY Thousands of tons of tangerines edd.comTh When free trade in tangerines is allowed, the price of a ton of tangerines in Panama will be tangerines will be demanded in Panama, and At this price, Trending on r/aw have t deovered the tons will be supplied by domestic suppliers Therefore, Panama v tons of tangerines
At this price, tons of When free trade in tangerines is allowed, the price of a ton of tangerines in Panama will be tangerines will be demanded in Panama, and tons of tangerines. tons will be supplied by domestic suppliers. Therefore, Panama will import On the second graph showing the world price of tangerines, use the green (triangle symbols) and purple (diamond symbols) triangles once again to show the consumer and producer surplus once Panama allows free trade in tangerines. Then, compare both graphs to complete the following table and analyze the welfare effects of allowing free trade. Before Trade After Trade (Millions of \$) (Millions of \$) Consumer Surplus Producer Surplus million, and producer surplus million. by When Panama allows free trade, the country's consumer surplus of million. So the net effect of international trade on Panama's total welfare is a by

Consumer surplus is the area below demand curve and above equilibrium price.

Producer surplus is the area above demand curve and below equilibrium price.

The equilibrium price where domestic demand equals domestic supply is \$240 per pound. The equilibrium quantity is 250,000 tons.

Consumer surplus

Area of triangle = ½ x base x height

= ½ x (250-0) x (440-240)

=1/2 x 250 x 200= 1/2 x 50,000= \$25,000.

Producer surplus

Area of triangle = ½ x base x height

= ½ x (250-0) x (240-0)

=1/2 x 250 x 240= 1/2 x 60,000= \$30,000.

Total surplus= Consumer surplus + Producer surplus

= \$25,000 + \$30,000= \$55,000.

Quantity supplied= 100 tons

Quantity demanded= 400 tons

Imports is quantity demanded – quantity supplied=300 tons

Consumer surplus

Area of triangle = ½ x base x height

= ½ x (400-0) x (440-120)

=1/2 x 400 x 320= 1/2 x 128,000= \$64,000.

Producer surplus

Area of triangle = ½ x base x height

= ½ x (100-0) x (120-40)

=1/2 x 100 x 80= 1/2 x 8,000= \$4,000.

Total surplus= Consumer surplus + Producer surplus

= \$64,000 + \$4,000= \$68,000.

 With Free trade (\$) Without free trade (\$) Consumer surplus \$64,000 \$25,000 Producer surplus \$4,000 \$30,000

With free trade, consumer surplus increases by \$64,000 - \$25,000= \$39,000. Producer surplus decreases by \$30,000 - \$4000=\$26,000.

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