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Question
Macroeconomics
Posted 10 months ago
The market for hiking backpacks in the nation of Montrose is shown in this graph. The world price of hiking backpacks is .
What is true if Montrose opens itself to trade?
Choose 1 answer:
(A) The equilibrium price is and 25 backpacks are exported.
(B) The new equilibrium price is and Montrose will import 75 backpacks
(c) The equilibrium price is and 50 backpacks are imported.
(D) The equilibrium price is and 25 backpacks are exported.
(E) The equilibrium price cannot be determined but 50 units are imported.
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Answer from Sia
Posted 10 months ago
Solution
a
World Price as a Benchmark: When a country opens to trade and the world price is given, it becomes the benchmark for determining whether the country will import or export a good
b
Identifying Import or Export Condition: If the world price is below the domestic equilibrium price, the country will import the good. If the world price is above the domestic equilibrium price, the country will export the good
c
Analyzing Montrose's Market: Given the world price of $20, which is equal to Montrose's domestic equilibrium price, Montrose will neither export nor import backpacks, as the domestic market is able to satisfy the demand at the world price
d
Conclusion Based on Graph Analysis: Since the dashed line at the world price intersects the demand curve at 80 units and the supply curve at 5 units, it indicates that at the world price, domestic supply is less than domestic demand, leading to imports
e
Calculating Import Quantity: The difference between the quantity demanded (80 units) and the quantity supplied domestically (5 units) at the world price is the quantity imported, which is 80 - 5 = 75 units
Answer
(B) The new equilibrium price is $20 and Montrose will import 75 backpacks
Key Concept
International Trade and Market Equilibrium
Explanation
When a country opens to trade, if the world price is equal to the domestic equilibrium price, the country will engage in trade based on the difference between the quantity demanded and the quantity supplied at that price. In this case, Montrose imports 75 backpacks to meet the excess demand at the world price of $20.
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