Question

Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that Aquilonia’s new free-trade policy has a. Increased consumer surplus and producer surplus in the incense market b. Increased consumer surplus in the steel market and left producer surplus in the rug market unchanged c. Decreased consumer surplus in both the steel and rug markets d. Decreased consumer surplus in the steel market and increased total surplus in the incense market

Answer 1

D) decreased consumer surplus in the steel market and increased total surplus in the incense market.

Step-by-step explanation:

When a country is able to export a good, it means that the domestic price of thee good is lower than the world price. A lower domestic price represents a higher consumer surplus, but as the good is exported, the domestic price will rise to match the world price. This will result in lower consumer surplus.

On the other hand, when a country imports a god, it means that the domestic price was higher than the world price. A higher domestic price represents a lower consumer surplus, but as the good is imported, the domestic price will fall to match the world price. This will result in higher consumer surplus.

Answer 2

b. Increased consumer surplus in the steel market and left producer surplus in the rug market unchanged

Step-by-step explanation: