If an import-competing firm is the only domestic producer of a good, then a transition from autarky to free trade will ________ domestic price, ________ producer surplus, ________ consumer surplus, and ________ overall domestic national welfare.
A) increase; increase; increase; increase
B) decrease; decrease; decrease; decrease
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease
E) increase; increase; decrease; increase

Question

Quizplus · Accepted Answer

The transition from autarky (no trade) to free trade (imports allowed) will expose the domestic firm to competition from foreign producers, which will decrease the domestic price of the good. As the only domestic producer, the firm will have to lower its price to compete with imports. This will result in a decrease in producer surplus for the domestic firm. However, with the lower price, consumers will benefit from an increase in consumer surplus. Overall, domestic national welfare will increase because the gain in consumer surplus will be larger than the loss in producer surplus.

If an Import-Competing Firm Is the Only Domestic Producer of a Good