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April 21, 2015

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Posted by Mary on Monday, July 26, 2010 at 6:39pm.

Suppose the U.S is an importer of product X and that there are no trade restrictions. Let us assume that the U.S. consumers buy 1 million units of X each year, of which 400,000 are produced domestically and 600,000 are imported.
a) Suppose a technological advance in Japan causes the world price of X to fall by $100. Draw a graph to show how this change affects the well-being of U.S. consumers and U.S. producers of product X. (You can assume that the U.S. is a small country in the world market for product X.)
ii) After the fall in price, consumers buy 1.2 million units of X, of which 200,000 are produced domestically and 1 million are imported. Calculate the change in the consumer well-being and producer well-being from the price reduction. Which is larger? Why?

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