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Home's demand curve for wheat is D = 10020P. Its supply curve is S=20 + 20P. Derive
and...
Question:
Home's demand curve for wheat is
D = 100-20P.
Its supply curve is
S=20 + 20P.
Derive and graph Home's import demand schedule. What would the price of wheat be in the
absence of trade?
Now add Foreign, which has a demand curve
D*= 80 - 20P
and a supply curve
S*= 40 + 20P
a. Derive and graph Foreign?s export supply curve and find the price of wheat that
would prevail in Foreign in the absence of trade
b. Now allow Foreign and Home to trade with each other, at zero transportation cost.
Find and graph the equilibrium under free trade. What is the world price? What is
the volume of trade?
Trade and Equilibrium:
In international trade economics, the equilibrium occurs where the world demand for a good or
service is equal to the world supply of that product or service. It is the point of intersection
between the world demand curve and the world supply curve.
Answer and Explanation:
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1. For the equilibrium, Home's demand curve = Home's supply curve
=> 100-20P = 20+20P
=> P = $2
and Demand = 60 units.
Home
2. For the equlibrium, Foreign's demand curve = Foreign's supply curve
=> 80-20P* = 40+20P*
=> P* = $1.
Quantity = 60 units.
Foreign
3. For equilibrium,
World Demand = World Supply
=> D + D* = S + S*
=> 180-40P = 60+40P
=> P = $1.5.
Free Trade Equilibrium
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Learn more about this topic:
The Economics & Politics of International Trade
from
Chapter 30 / Lesson 4
19K
Exchanging goods between countries beyond their national borders constitutes international
trade. Examine the impacts associated with international trade, what helps endure success
among participating countries, and how the economic and political outcomes can also have a
downside.
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