Question

The demand for cars in Home is q = 30 – P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 20 – P and the supply of cars in Foreign is q = P.a) Calculate the equilibrium price and quantity in each country under isolation.b) Who is the importer of cars and who is the exporter?c) Write the import demand for Home and the export supply for Foreign.

Answer 1

Equilibrium price and Quantity are the price at which Demand and Supply equal each

1. Local

If quantity demanded = 30 - p

And quantity supplied = p

And we know equilibrium is achieved when both are equal.

Therefore 30 - p = p is equilibrium

2p = 30

P = 15

Equilibrium Quantity demanded & supplied = 30 - 15 = 15.

2. Foreign

If quantity demanded = 20 - p

And quantity supplied = p

And we know equilibrium is achieved when both are equal.

Therefore 20 - p = p is equilibrium

2p = 20

P = 10

Equilibrium Quantity demanded & supplied = 20 - 10 = 10

3. The importer of cars is the demand for foreign = 20 - P

4. The exporter of cars is the supply of foreign cars = P.