This graph demonstrates the domestic demand and supply for a good,as well as a quota and the world price for that good. According to the graph shown,if the economy opens itself to free trade,producer surplus will:

Question

This graph demonstrates the domestic demand and supply for a good,as well as a quota and the world price for that good.  According to the graph shown,if the economy opens itself to free trade,producer surplus will:

Quizplus · Accepted Answer

If the economy opens itself to free trade, the domestic price will fall to the world price (Pworld), at which point the quantity demanded in the domestic market will exceed the quantity supplied (shown by the vertical distance between D and S before the opening of trade). Therefore, imports will occur to meet the excess demand. The increase in imports will essentially replace domestic production (represented by the horizontal distance between Qs and Qd), leading to a decrease in producer surplus from area ABC to area I. Consumer surplus, on the other hand, will increase from area A to area ABCDEFGH. Overall, the gains from trade (the increase in consumer surplus) will exceed the losses from trade (the decrease in producer surplus).

This Graph Demonstrates the Domestic Demand and Supply for a Good,as