Question

Suppose Iceland goes from being an isolated country to being an exporter of coats. As a result, a. consumer surplus increases for consumers of coats in Iceland. b. producer surplus increases for producers of coats in Iceland. c. total surplus remains unchanged in the coat market in Iceland. d. it is reasonable to infer that other countries have a comparative advantage over Iceland in coat production.

Answer 1

Answer:

Option (b) is correct.

Explanation:

It is reasonable to infer that Iceland have a comparative advantage in producing coats, it is may be due to the lower opportunity cost of producing than the other country.

A country is exporting a commodity in which it has a comparative advantage and also, a country is exporting a commodity if the world price of the product is greater than the domestic price of the product.

Under a free trade condition, Iceland continue exporting coats until the domestic price become equal to the world price.

Hence, if there is any increase in the domestic price of the coat then this will result in a reduction in consumer surplus.

If Iceland exports coats at the world price then the producers of the coats will experience an increase in the producers surplus.