Suppose that Norway is a small country and currently produces 100,000 board feet of lumber at $600 per 1,000 board feet. Then it begins to trade at the world price of $500 per 1,000 board feet. As a result of trade, Norway's production falls to 50,000 board feet and its consumption increases to 200,000 board feet. What is Norway's total gain in consumer surplus once it begins to trade?
A) $10,000
B) $15,000
C) $100,000
D) $150,000

Question

Quizplus · Accepted Answer

Norway's original production was 100,000 board feet, producing a surplus of 50,000 board feet. At the world price of $500 per 1,000 board feet, if Norway had produced 100,000 board feet, it would have consumed 100,000 board feet, leaving no surplus for trade. Therefore, Norway decides to produce only 50,000 board feet and import the additional 150,000 board feet necessary to meet their consumption needs.

The consumer surplus is the difference between the amount consumers are willing to pay for a good or service and what they actually pay. Before trade, consumers paid $600 per 1,000 board feet for domestic lumber. After trade, they are able to purchase lumber for $500 per 1,000 board feet on the world market. This represents a gain in consumer surplus of $100 per 1,000 board feet.

Therefore, the total gain in consumer surplus can be calculated as follows:

($100 gain in consumer surplus per 1,000 board feet) x (150,000 board feet imported) = $15,000 total gain in consumer surplus.

Suppose That Norway Is a Small Country and Currently Produces