The graph shows the market for wheat in an economy. The equilibrium price and quantity of wheat bought and sold in the domestic market in the absence of international trade are P₂ and Q₂, respectively. If the world price of wheat is P₃, the net domestic gain from trade is shown by area _____ in the graph.Figure 18.1

Question

Quizplus · Accepted Answer

The net domestic gain from trade can be calculated as the difference between the total surplus with trade and the total surplus without trade. The equilibrium price with trade is determined by the world price, PS1U1B13S1U1B0, and the domestic quantity demanded and supplied, giving an equilibrium quantity of QD1U1B14S1U1B0 and QS1U1B15S1U1B0. The total surplus with trade is represented by the sum of consumer surplus, producer surplus, and government revenue, which is the area below the demand curve and above the world price (A + B + C + D) minus the area below the supply curve and above the world price (E). The net domestic gain from trade is represented by the area that corresponds to the difference between the total surplus with trade and the total surplus without trade, which is area D. Therefore, the answer is D.

The Graph Shows the Market for Wheat in an Economy