Question

The world price of grapefruits is above the price that currently prevails in Cuba in the absence of trade. Assuming that Cuba is a small economy compared to the rest of the world, what happens if Cuba decides to open up trade with the world grapefruit market? The price of domestic Cuban grapefruit for consumers will:________.A) Decrease.B) Increase.C) Not Change. Cuban exports of grapefruits will:________.A) Decrease.B) Increase.C) Not Change.Lastly, consumer surplus in cuba will:________.A) Decrease.B) Increase.C) Not Change.While producer surplus in cuba will:________.A) Decrease.B) Increase.C) Not Change.

Answer 1

Answer:

The price of domestic Cuban grapefruit for consumers will increase,option B

Cuban exports of grapefruits will increase,option B

Consumer surplus in Cuba will decrease,option A

Producer surplus in Cuba will increase.option B

Explanation:

Opening up the economy paves way for producers of grapefruit to sell their output in the international market due to the incentive provided by higher international price,hence there would less to sell in the home front,thereby pushing up domestic price.

Of course,producers in Cuba would  prefer export to selling locally, as a result Cuban exports of grapefruits will increase.

Consumer would reduce because of increase in price as the surplus is the difference between local price and higher international price and conversely producer surplus increases