Question

The u.s. demand and supply for a good are shown. under a policy of free trade, where imports are permitted, the world price is pw. if there is a policy change such that imports are prohibited, the price becomes pn, consumers' surplus equals______and producers' surplus equals .

a. bcd; pnde
b. pnab; pnbe
c. pnad; pwbde

Answer 1

When imports are prohibited, consumers' surplus decreases to the area formed by PNoTrade, E, and B (pnab), while producers' surplus increases to the area PNoTrade, E, and D (pnbe), as illustrated in option B.

Step-by-step explanation:

The consumer surplus and producer surplus in the context of trade and market equilibrium are impacted by changes in trade policy.

When free trade is permitted and the market is in equilibrium at world price (PW), the consumer surplus is the area formed by the points PW, A, and B. If imports are prohibited and the domestic price increases to the no-trade price (PN), the consumer surplus decreases to the area of the triangle PN, E, and B while the producer surplus increases to the area of the triangle PN, E, and D.

Given the options provided, the correct answer is that under a policy change such that imports are prohibited, consumers' surplus equals area PNAB and producers' surplus equals area PNEBD, which is option B: pnab; pnbe.