The figure below shows the domestic supply and demand of a product in the United States.

-Refer to the figure above.If the world price of this product is $14,the consumer surplus in the United States before free trade is equal to ________ ,and the consumer surplus after free trade will equal ________.

Question

The figure below shows the domestic supply and demand of a product in the United States.
 
-Refer to the figure above.If the world price of this product is $14,the consumer surplus in the United States before free trade is equal to ________ ,and the consumer surplus after free trade will equal ________.

Quizplus · Accepted Answer

Before free trade, the domestic price is $16 and the quantity demanded is 5 million while the quantity supplied is 10 million. Therefore, the consumer surplus is ($16 - $12) x 5 million / 2 = $40 million.

After free trade, the domestic price will equal the world price of $14. At this price, the quantity demanded is 7 million while the quantity supplied is 8 million. Therefore, the consumer surplus is ($14 - $12) x 7 million / 2 = $28 million.

The difference between the consumer surplus before and after free trade is $40 million - $28 million = $12 million. Therefore, the consumer surplus after free trade will be $40 million - $12 million = $28 million, which is half of the initial consumer surplus. Therefore, the correct answer is (C) $160; $40.

The Figure Below Shows the Domestic Supply and Demand of a Product