Suppose that the equations S = 2P and D = 6 - P represent a small country's home supply and home demand curves. If the world price is $1, which of the following is the increase in the country's welfare when it trades compared with autarky?
A) $6.00
B) $4.50
C) $1.50
D) $0.50

Question

Quizplus · Accepted Answer

In autarky, equilibrium is where S = D, so 2P = 6 - P, giving P = 2 and Q = 4. Consumer surplus is 0.5*(6-2)*4 = $8, and producer surplus is 0.5*2*4 = $4. Total welfare is $12. With trade at world price $1, Qd = 6-1 = 5 and Qs = 2*1 = 2. Consumer surplus is 0.5*(6-1)*5 = $12.5, and producer surplus is 0.5*1*2 = $1. Total welfare is $13.5. The increase in welfare is $13.5 - $12 = $1.50.

Suppose That the Equations S = 2P and D =