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Chapter 2 Pugel Solution

The document outlines the demand and supply equations for writing pads in Tanzania and calculates the equilibrium price and quantity without international trade, finding an equilibrium price of 100 and quantity of 300. It also analyzes the impact of free trade at a price of 120, resulting in a demand of 290 and supply of 400, and discusses the changes in consumer and producer surplus. Finally, it addresses the net welfare gain or loss for Tanzania by comparing total welfare before and after free trade.

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Shamima Akter
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63 views6 pages

Chapter 2 Pugel Solution

The document outlines the demand and supply equations for writing pads in Tanzania and calculates the equilibrium price and quantity without international trade, finding an equilibrium price of 100 and quantity of 300. It also analyzes the impact of free trade at a price of 120, resulting in a demand of 290 and supply of 400, and discusses the changes in consumer and producer surplus. Finally, it addresses the net welfare gain or loss for Tanzania by comparing total welfare before and after free trade.

Uploaded by

Shamima Akter
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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3.

The equation for the demand and supply curves for writing pads in Tanzania are given as: 𝑄𝑑=350-P/2
, and 𝑄𝑠=-200+5𝑃

i. Calculate the equilibrium price and quantity if there is no international trade. Calculate the equilibrium
quantities if Tanzania were to trade freely with the rest of the world at a price of 120.

ii. Calculate the effect of the shift from no trade to free trade on the following:

a. Tanzania's consumer surplus

b. Tanzania's producer surplus

iii. Calculate the net welfare gain or loss for Tanzania.

i. Equilibrium Price and Quantity

To find the equilibrium price and quantity without international trade, we set the demand and
supply equations equal to each other:

Demand: (Q_d = 350 - \frac{P}{2})

Supply: (Q_s = -200 + 5P)

Setting (Q_d = Q_s), we get:

(350 - \frac{P}{2} = -200 + 5P)

Solving for (P), we find:

(P = 100)

Substituting (P = 100) into either the demand or supply equation gives us the equilibrium
quantity:

(Q = 350 - \frac{100}{2} = 300)

Now, to calculate the equilibrium quantities if Tanzania were to trade freely with the rest of the
world at a price of 120, we simply substitute (P = 120) into the demand and supply equations:

Demand: (Q_d = 350 - \frac{120}{2} = 290)

Supply: (Q_s = -200 + 5*120 = 400)

ii. Effect of Free Trade


a. Tanzania's Consumer Surplus: To calculate the effect on consumer surplus, we find the area
between the demand curve and the equilibrium price both before and after free trade. The change
in consumer surplus is the difference between the two areas.

b. Tanzania's Producer Surplus: Similarly, the effect on producer surplus is calculated by finding
the area between the supply curve and the equilibrium price before and after free trade.

iii. Net Welfare Gain or Loss

The net welfare gain or loss for Tanzania can be calculated by comparing the total welfare
(consumer surplus + producer surplus) before and after free trade. If the total welfare increases,
there is a net gain; if it decreases, there is a net loss.

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