Suppose the domestic market demand function in a certain market where Q is measured in thousands of units is Q^d = 20 - 2.5P,and the domestic market supply function is Q^s = 2.5P - 7.5.Suppose further that the world price for the good in question is $3.40 per unit.Under conditions of free trade,how much consumer surplus will there be? A) $26,450 B) $26,650 C) $52,900 D) $53,300

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Under free trade, the domestic price will be equal to the world price, which is $3.40 per unit. Therefore, the domestic quantity demanded and supplied will be: Qd = 20 - 2.5P = 20 - 2.5(3.40) = 11.5 thousand units Qs = 2.5P - 7.5 = 2.5(3.40) - 7.5 = 0.5 thousand units Since Qd > Qs, the domestic market is in surplus and will export 11 thousand units (11.5 - 0.5). Consumer surplus is the difference between the maximum amount that consumers are willing to pay for the good and the actual price they pay. In this case, the demand function is Q^d = 20 - 2.5P, which implies that the maximum amount consumers are willing to pay for each unit is $8. Therefore, the total consumer surplus is: CS = 0.5 x (8 - 3.4) x 11,000 = $26,450 Therefore, the best choice is A) $26,450, which is the total consumer surplus under free trade conditions.

Suppose the Domestic Market Demand Function in a Certain Market