Question

2 Analytical problems Using the following information to answer the questions below: Suppose Home's demand for coffee is given by: D- 100-20P and its supply curve is given by: S-20+20P Foreig's demand for coffee is given by: D-80-20P and its supply curve is given by: S-40+20P . (3 point) What would the price of coffee be in Home and in Foreign in the absence of trade?

Answer 1

4).

Now, the home demand and the supply are given by.

=> “D=100-20*P” and “S=20+20*P”, => at the equilibrium “D=S”.

=> 100-20*P = 20+20*P, => 80 = 40*P, => P = 2. The corresponding quantity is given by, “D=100-20*P=60”. So, here the equilibrium “P” and quantity are given by, “P=2” and “D=S=60”.

Similarly, the foreign demand and the supply are given by.

=> “D* = 80-20*P” and “S = 40 + 20*P”, => at the equilibrium “D*=S*”.

=> 80-20*P = 40 + 20*P, => 40 = 40*P, => P* = 1. The corresponding quantity is given by, “D*=80-20*P=60”. So, here the equilibrium “P” and quantity are given by, “P*=1” and “D*=S*=60”.

5/a).

Now, under free trade foreign country will export the good and the home country will import the good. Since the foreign autarkic equilibrium “P” is less compare to home autarkic equilibrium “P”. So, the import demand function of home is given by.

=> M = D-S = (100-20*P) – (20+20*P) = 80 - 40*P, => M = 80 - 40*P. Now, the export supply curve is given by.

=> X = S*- D*= (40+20*P) – (80-20*P) = 40*P – 40, X = 40*P – 40. So, at the equilibrium “M=X”.

=> 80 - 40*P = 40*P – 40, => 120 = 80*P, => P = 120/80 = 1.5, => Pw=1.5, be the world equilibrium price here.

b).

Consider the following fig.

Ea P-2 Pw 1.5 S1-50 D1-70 Level of import

So, here “Ea” be the autarkic equilibrium where “D” and “S” cut to each other. So, the “P=2” be the autarkic equilibrium price. Now, under free trade the world price is given by “Pw=1.5”, => the corresponding demand is “D1=70” and supply is “S1=50”, => the level of import by the home country is given by, “D-S = 20units”.