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Draw graphs and show your calculations in answering these questions
Draw graphs and show your calculations in answering these questions. The demand for silk cloth in the United States is characterized by the equation P = 7 - Q/1000, where Q is yards of silk cloth. U.S. producers of silk will supply silk to the U.S. market based on the equation P = 1 + Q/200. The rest of the world will sell as much silk as U.S. consumers will purchase for a price of $3 (Hint: the supply curve for the rest of the world is flat at $3). (a.) If there is free trade between the U.S. and the rest of the world, what will be the market price of silk in the United States? (b.) How much silk will American consumers purchase? (c.) How much silk will American producers sell? (d,) How much silk will Americans import from the rest of the world? (d.) Show on a graph American consumer surplus and American producer surplus.
Expert Solution
(a.) From the US supply curve equation, it can be determined that the supply price is below $3 until production (Q) reaches 400. Beyond that level, U.S. producers are priced out of the market and the supply curve becomes the horizontal world supply curve at a fixed $3 price. The price of silk will therefore be $3.
(b.) The quantity demanded in the U.S. can be determined from the demand curve equation as follows:
P = 7 - Q/1,000
3 = 7 - Q/1,000
Q = 4,000 yards of silk.
(c.) American producers will sell 400 yards of silk. Beyond that quantity, their cost exceeds the world price of $3.
(d.) Americans will import from the rest of the world the difference between the quantity demanded and the amount supplied by domestic producers (4,000 - 400 = 3,600).
(e.) American consumer surplus is the triangle area A in the graph. American producer surplus is the triangle area B in the graph.
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