SCENARIO: PRODUCTION IN NORWAY
Suppose that Norway is a small country and currently produces 100,000
Board feet of lumber at $600 per 1,000 board feet.Then it begins to trade
At the world price of $500 per 1,000 board feet.As a result of trade,
Norway's production falls to 50,000 board feet and its consumption
Increases to 200,000 board feet.
Reference: Ref 82
(Scenario: Production in Norway) What is Norway's total gain in consumer
Surplus once it begins to trade?
A)$10,000
B)$15,000
C)$100,000
D)$150,000

Question

SCENARIO: PRODUCTION IN NORWAY
Suppose that Norway is a small country and currently produces 100,000
Board feet of lumber at $600 per 1,000 board feet.Then it begins to trade
At the world price of $500 per 1,000 board feet.As a result of trade,
Norway's production falls to 50,000 board feet and its consumption
Increases to 200,000 board feet.
Reference: Ref 8­2
(Scenario: Production in Norway) What is Norway's total gain in consumer
Surplus once it begins to trade?
A)$10,000
B)$15,000
C)$100,000
D)$150,000

Quizplus · Accepted Answer

Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay. Before trade, Norway's domestic price for lumber was $600 per 1,000 board feet, so consumers were willing to pay up to $600 per 1,000 board feet. After trade, the world price for lumber is $500 per 1,000 board feet, so consumers are paying less than they were before.

To calculate the gain in consumer surplus, you need to find the area between the demand curve and the new price line (at $500 per 1,000 board feet) for the increased quantity of lumber consumed (200,000 board feet). This is a triangle with a height of $100 (the difference between the old price and the new price) and a base of 150,000 board feet (the increase in quantity consumed). Therefore, the gain in consumer surplus is 1/2 x $100 x 150,000 = $7,500. However, this gain occurs twice (since there are two halves of the demand curve), so the total gain in consumer surplus is $7,500 x 2 = $15,000. Therefore, the best choice is B, $15,000.