Question

An economy opens itself up to international trade. What would happen if the average global price for a good is lower than the domestic equilibrium price with no government interventions? (2 points)

Domestic supply would increase as well as domestic demand.
Domestic supply would decrease, and domestic demand would increase.
Domestic quantity supplied would decrease, and domestic demand would increase.
Domestic quantity supplied would decrease, and domestic consumption would increase.
The domestic market would not be affected.

Answer 1

When a good's global price is lower than the domestic price, domestic quantity supplied decreases and domestic consumption increases due to the foreign price effect.

Step-by-step explanation:

When an economy opens itself up to international trade and the average global price for a good is lower than the domestic equilibrium price, with no government interventions, the domestic outcome changes significantly. Based on the foreign price effect, cheaper goods from abroad means domestic consumers will increase their consumption by opting for these lower-priced imports over higher-priced domestic goods.

This shift in behavior leads to a decrease in domestic quantity supplied, as domestic producers are unable to compete at the lower prices, and an increase in domestic demand for the cheaper imports. Consequently, the correct answer is that domestic quantity supplied would decrease, and domestic consumption would increase.