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 producer surplus will there be? A) $26,450 B) $200 C) $400 D) $600

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Quizplus · Accepted Answer

Under free trade, the domestic price will be equal to the world price of $3.40. The domestic supply at this price is Q^s = 2.5(3.40) - 7.5 = 1. The producer surplus is the area of the triangle formed by the supply curve and the price line, which is 0.5 * base * height = 0.5 * 1 * (3.40 - 3) = $0.20 thousand, or $200.

Suppose the Domestic Market Demand Function in a Certain Market