The figure below shows the demand (D) and supply (S) curves of cocoa in the U.S.Figure 21.4

-When the world price of the traded good is lower than the domestic no-trade equilibrium price, free trade causes domestic production to fall and domestic consumption to rise.

Question

The figure below shows the demand (D) and supply (S) curves of cocoa in the U.S.Figure 21.4
 
-When the world price of the traded good is lower than the domestic no-trade equilibrium price, free trade causes domestic production to fall and domestic consumption to rise.

Quizplus · Accepted Answer

When the world price is lower than the domestic no-trade equilibrium price, free trade allows imports to enter the market. This increases the supply and leads to a higher quantity of cocoa being consumed domestically at a lower price. Domestic producers cannot compete with the lower-priced imports and their production decreases. Therefore, domestic production falls and domestic consumption rises as a result of free trade.

The Figure Below Shows the Demand (D) and Supply (S)