The following figure shows the demand and supply curves for a product. Estimate the total gains from trade.
A)$1400
B)$2000
C)$1275
D)$2125

Question

The following figure shows the demand and supply curves for a product. Estimate the total gains from trade. 
A)$1400 
B)$2000 
C)$1275 
D)$2125

Quizplus · Accepted Answer

To calculate the total gains from trade, we need to find the area between the supply and demand curves. The equilibrium price is where the curves intersect, at $15 per unit. At this price, the quantity demanded is 100 units and the quantity supplied is also 100 units.

To find the total gains from trade, we need to calculate the area of two triangles and one rectangle. The top triangle is formed by the price of $20, the quantity demanded at that price (60 units), and the quantity supplied at the equilibrium price (40 units). The area of this triangle is (1/2) x (20-15) x (60-40) = $300.

The bottom triangle is formed by the price of $10, the quantity supplied at that price (60 units), and the quantity demanded at the equilibrium price (40 units). The area of this triangle is (1/2) x (15-10) x (60-40) = $300.

The rectangle is formed by the equilibrium price ($15) and the quantity traded (40 units). The area of this rectangle is $15 x 40 = $600.

Therefore, the total gains from trade are $300 + $300 + $600 = $1200. However, this is only the gains from trade for the buyers and sellers. If we include the gains from trade for society as a whole (which includes consumer and producer surplus), then the total gains from trade would be larger.

Option D is the closest option to our calculated answer of $1200.

The Following Figure Shows the Demand and Supply Curves for a Product