Question

For each of the following statements, indicate whether it is true or false for a country that exports a good abroad. Statement True False The greater the elasticity of supply, the greater the gains from trade. If supply is perfectly inelastic, the fall in consumer surplus would exceed the rise in producer surplus. Producers can still benefit from trade even if supply is perfectly inelastic.

Answer 1

- The greater the elasticity of supply, the grater the gains from trade.

TRUE.

This situation is true because in an elastic supply situation there is a decrease in prices and an increase in demand, so total surpluses increase and generate more gains to trade.

- If supply is perfectly inelastic, the fall in consumer surplus would exceed the rise in producer surplus.

FALSE

It is false because In a perfectly inelastic supply situation, the quantity of demand does not change even if prices change.

- Producers can still benefit from trade even if supply is perfectly inelastic.

FALSE

It is false because in a perfectly inelastic supply situation the beneficiary will be the consumer, as prices will not change and consumer surplus will increase.