(Figure: Market for Engines) The world price of an engine is $1,000. According to the figure, international trade will _____ the domestic producer surplus and _____ the domestic consumer surplus.

Question

Quizplus · Accepted Answer

At the world price of $1,000, domestic producers will supply 100,000 engines and domestic consumers will demand 250,000 engines. In the absence of trade, domestic producer surplus is the area above the domestic supply curve and below the world price (triangle A). Domestic consumer surplus is the area below the domestic demand curve and above the world price (triangle B). When trade is allowed, domestic producers will supply 200,000 engines at the world price, resulting in an increase in producer surplus (triangle A + rectangle C). However, domestic consumers will only be able to purchase 150,000 engines at the world price, leading to a decrease in consumer surplus (triangle B - rectangle C). Overall, there is a net gain in total surplus, but domestic producer surplus increases and domestic consumer surplus decreases. Therefore, option B is the best choice.

(Figure: Market for Engines) the World Price of an Engine