Question

1.The domestic demand (Q D) and supply (QS) for strawberries in Canada are given respectively by QD= 600 – 20P and QS= -150 + 30P where P is the price per box of strawberries. (60 marks total)

a) What would be the equilibrium price and quantity if Canada could not trade with any other country for strawberries? (5 marks)

b) Calculate producer surplus, consumer surplus and total surplus in the autarky situation (no trade) for strawberries in Canada? (12 marks)

c) Canada is a “small” country in the global market for strawberries since its production or consumption levels do not affect world price. The world price for strawberries is $10 per box. How much will Canada consume? How much will it produce domestically and how much will it import (or export)? (9 marks)

d) If trade is allowed, calculate producer surplus, consumer surplus and total surplus for strawberries in Canada? (8 marks)

e) Calculate the net change in consumer surplus, producer surplus and total welfare by allowing free trade. (6 marks)

f) The imports of strawberries into Canada are from the United States. In response to tariffs being imposed on Canadian steel by the United States, Canada decides to impose an import quota of 200 boxes. What will be the new price of strawberries in Canada? (Hint use the excess demand equation and equate it to 200). (8 marks)

g) Use a properly labeled diagram to illustrate the winners and losers from the imposition of an import quota of 200 boxes by Canada. (12 marks)

Answer 1

(a)

600 - 20P = -150 + 30P

50P = 750

P= 15

Q = 600 - 20*15 = 300

(b)

Consumer surplus = 1/2*15*300 = 2250

QS= -150 + 30P

P = 5 + Qs / 30

Producer surplus = 1/2* 5 * 300 = 750

Total surplus = 2250+750 = 3000

(c)

Pw = $10,

Qd = 600 - 20*10 = 400

Qs = -150 + 30 * 10 = 150

Import = 400 - 150 = 250

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