When all trade is prohibited in good X, the equilibrium price in the home country is P_X. After free trade is instituted, the domestic country begins to import good X from the rest of the world. As a result of free trade:

Question

Quizplus · Accepted Answer

When free trade is instituted, the domestic country begins to import good X from the rest of the world, which increases the supply of good X in the domestic market. As a result, the equilibrium price will fall. This is because the domestic supply curve now includes imports, which are available at a lower price than the previous domestic price, and the market price will adjust to the intersection of the new supply curve and the original demand curve. Therefore, the domestic price of good X will fall. The other choices are false because the domestic price will not rise or exceed the price in foreign countries due to increased competition from imports, and the producers will not gain surplus at the expense of domestic consumers as both parties benefit from the lower equilibrium price.

When All Trade Is Prohibited in Good X, the Equilibrium