Figure 911 Price of Carnations 14 12 10 Domestic Supply 6 Ta

Figure 9-11 Price of Carnations $14 12 10 Domestic Supply 6 Tariff World Price 4 Domestic Demand 2 100 200 300 400 500 600 Quantity of Carnations (in dozens) 20. Refer to Figure 9-11. What will happen in this market with free trade? The domestic price will equal the world price. Carnations will be sold at $8 in this market. There will be a shortage of 400 carnations in this market. There will be a surplus of 400 carnations in this market. a. b. c. d.

Solution

20

As it can be seen the diagram without trade in the domestic country, the price will be $8 and quantity 300 carnation.

But with free trade, the domestic country demand is 500 quantity of carnation but supply is only 100 quantity of carnation at world price.

It means there is shortage of 400 quantity of carnation at world price of $4.

Shortage=500-100=400

Hence option c is the correct answer.

Option c; there will be a shortage of 400 carnation in this market