MankiwChapter09SolutionsProblems

N. Gregory Mankiw – Principles of Economics
Chapter 9. APPLICATION: INTERNATIONAL
TRADE
Solutions to Problems and Applications
1.

a.

In Figure 3, with no international trade the equilibrium price is P1 and the equilibrium quantity is Q1. Consumer surplus is area A and producer surplus is area B + C, so total surplus is A + B + C.

Figure 3

2.

b.

When the U.S. orange market is opened to trade, the new equilibrium price is PW, the quantity consumed is QD, the quantity produced domestically is QS, and the quantity imported is QD – QS. Consumer surplus increases from A to A + B + D + E. Producer surplus decreases from B + C to C. Total surplus changes from A + B + C to A + B + C
+ D + E, an increase of D + E.

a.

Figure 4 illustrates the U.S. market for wine, where the world price of wine is P1. The following table illustrates the results under the heading "P1."
Consumer Surplus
Producer Surplus
Total Surplus

P1

A+B+D+E
C
A+B+C+D+E

P2

A+D
B+C
A+B+C+D

CHANGE
–(B+E)
+B
–E

1

Chapter 9

Figure 4
b.

3.

The shift in the Gulf Stream destroys some of the grape harvest, raising the world price of wine to P2. The table shows the effects on consumer, producer, and total surplus, under the heading "P2" and the change in the surplus measures under the heading
"CHANGE." Consumers lose, producers win, and the United States as a whole is worse off. Figure 5 shows the market for cotton in countries A and B. Note that the world price of cotton is the same in both countries. Country A imports cotton from country B. The table below shows that total surplus is higher in both countries. However, in country A, consumers are better off and producers are worse off, while in country B, consumers are worse off and producers are better off.

Chapter 9
Figure 5

4.

Consumer Surplus
Producer Surplus
Total Surplus

COUNTRY A
Before Trade
After Trade
C
C+D+F
D+E
E
C+D+E
C+D+E+F

CHANGE
+(D+F)
–D
+F

Consumer Surplus
Producer Surplus
Total Surplus

COUNTRY B
Before Trade
After Trade