Question

Questions 1-6: The diagram below depicts the supply and demand curves for bicycles. Use the diagram to answer the following questions 1 to 6. Price (Sunit) 150 Supply 70 40 Demand 10 100 200 300 Quantity 4. The economy transitions from no trade to free trade and the new international equilibrium price for a bicycle is $40. How does this affect the consumer surplus in this economy? a. Decreases by $7 500 Decreases by $2,000 OC Increases by $3,000 d. Increases by $7500 O b Ос.

Not sure how to solve this

Answer 1

The no trade equilibrium will be at the price of $70 and the quantity of 200. And when there is free trade in the economy the price has reduced to $40, here the consumer surplus has increased and the producer surplus has decreased. The consumer surplus is the area below the demand curve and above the price line. The producer surplus is the are above the supply curve and below the price line.

The no trade equilibrium will be at the price of $70 and the quantity of 200. And when there is free trade in the economy the price has reduced to $40, here the consumer surplus has increased and the producer surplus has decreased. The consumer surplus is the area below the demand curve and above the price line. The producer surplus is the are above the supply curve and below the price line. The total surplus is the sum of both the consumer and producer surplus, At the no trade position the consumer surplus was - 1/2 times 200 times 80 = 8000. At the free trade the consumer surplus is = 1/2 times 280 times 110 = 15400 So the consumer surplus is increased by 15400 - 8000 = 7400. Ans: d). increased by $7500.

The total surplus is the sum of both the consumer and producer surplus ,

At the no trade position the consumer surplus was

$=1/2\times 200\times 80$

  $=8000$.

At the free trade the consumer surplus is

  $=1/2\times 280\times 110$

  $=15400$

So the consumer surplus is increased by $15400-8000=7400$.

Ans: d). increased by $7500.