Question

the graph above shows the domestic market for sandalwood in equilibrium at a price of $800 per kilogram in the absence of international trade. now assume the country begins to engage in international trade, and sandalwood is selling at a price of $600 per kilogram in the world market. which of the following would most likely result?

Answer 1

I looked for a similar question in order to get the graph and found the missing options also:

• A) The country would increase domestic production to become competitive in the world market.
• B) The country would export sandalwood, and its domestic consumer surplus would increase.
• C) The country would export sandalwood, and its total surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases.
• D) The country would import sandalwood, and its total surplus would decrease, with both the domestic consumer surplus and the domestic producer surplus decreasing.
• E) The country would import sandalwood, and its total surplus would increase, with the domestic consumer surplus increasing by more than the domestic producer surplus decreases.

Options A, B and C are completely wrong, since the country would start importing sandalwood since the world price is lower until equilibrium is reached at $600 per kilogram.

That leaves us with options D and E. Option D must be ruled out because consumer surplus will increase while producer surplus will decrease.

The only option left is E:

• sandalwood would be imported
• domestic surplus increases
• supplier surplus decreases