Consider pepper jack cheese and parmesan cheese markets for

Consider pepper jack cheese and parmesan cheese markets for the US. The domestic market equilibrium price and quantity for pepper jack is $10 and 100 respectively. On the other hand The domestic market equilibrium price and quantity for parmesan is $15 and 150 respectively. The world price of pepper jack is $12 and world price of parmesan is $10. Assume that the US does not have any power to effect the price level in the world. Assume the US opens up to international production for both of these goods.

Answer the following 3 questions according to this passage.

Which of the following is true?                     

A.   US is the exporter of pepper jack and importer of parmesan.

B. US is the exporter of parmesan and importer of pepper jack.

C. We don\'t have enough information to answer this question.

Now assume that quantity supplied for pepper jack is 120 and quantity demanded for pepper jack is 90 under world price. What are the gains from trade for the US in pepper jack market?        

A. 10

B. 40              

C. 20              

D. 30

Now assume the quantity supplied for parmesan is 1 and quantity demanded is 200 in the US under world price. What are the gains from trade in parmesan market?               

A. 697.5                    

B. 597.5                    

C. 497.5                    

D. 397.5

Solution

1) ans is A. US or Nation will export the commodity for which domestic price is less than world price and import the product for which the domestic price is less than world price.

2) gain=area of triangle which is increased=1/2*price differential*qty traded=1/2*2*30=30 Ans is D

3) ans is C

gains=1/2*(15-10)*(200-1)=497.5