The figure above shows the U.S. market for T-shirts, where SUS is the domestic supply curve and DUS is the domestic demand curve. The United States trades freely with the rest of the world. The world price of a T-shirt is $5.
-Based on the figure above,as a result of international trade,producer surplus
A) increases by $150 million.
B) decreases by $150 million.
C) increases by $90 million.
D) decreases by $90 million.
E) remains unchanged.

Question

The figure above shows the U.S. market for T-shirts, where SUS is the domestic supply curve and DUS is the domestic demand curve. The United States trades freely with the rest of the world. The world price of a T-shirt is $5.
-Based on the figure above,as a result of international trade,producer surplus
A) increases by $150 million. 
B) decreases by $150 million. 
C) increases by $90 million. 
D) decreases by $90 million. 
E) remains unchanged.

Quizplus · Accepted Answer

The domestic equilibrium price in the absence of trade would be $7 per T-shirt with a quantity of 250 million T-shirts. At a world price of $5 per T-shirt, there will be imports into the United States. The quantity demanded domestically increases from 250 million T-shirts to 425 million T-shirts (point A to point C), while quantity supplied domestically decreases from 250 million T-shirts to 175 million T-shirts (point A to point B). Producers will be willing to supply 175 million T-shirts at a price of $5 or higher, which is less than their cost of production ($7 per T-shirt). This will lead to a decrease in producer surplus by $90 million [(($7-$5)/2) x 175 million = $90 million]. Thus, choice D is the correct answer.

The Figure Above Shows the U