Question

The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $24, and the equilibrium quantity is 4 million T-shirts. One day, after reading Adam Smith's The Wealth of Nations while on vacation, the president decides to open the Textilian market to international trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 8 million, while the number of T-shirts produced declines to 2 million.
a. Illustrate the situation just described in a graph. Your graph should show all the numbers.
b. Calculate the change in consumer surplus, producer surplus, and total surplus that results from opening up trade. (Hint: Recall that the area of a triangle is1/2×base×height

Answer 1

Answer:

a) attached graph

b) triangle S represents the change in supplier surplus = 1/2 x -2,000,000 shirts x $8 = -$8,000,000

triangle C represents the change in consumer surplus = 1/2 x 4,000,000 shirts x ($8) = $16,000,000

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