You're part of a group of economic consultants supporting the government of Sweden. Sweden wants to liberalize trade in the automobile industry and your job is to help the government explore the benefits and costs of trade liberalization. Government analysts have provided you the following data for the domestic auto industry:
Table 1
Price (P) Quantity Demanded (QD) Quantity Supplied (QS)
20 40 0
35 20 25
50 0 50
a) Your first assignment is to examine the domestic market under autarky. Using these data, derive the domestic demand and supply equations for automobiles.
b) To visualize your findings, please graph the demand and supply curves.
c) What is the equilibrium quantity of autos sold in the domestic market and at what equilibrium price are they sold (both under autarky)?
d) To systematically examine the impact of opening Sweden's borders to trade, the autarky equilibrium establishes a benchmark. Indicate the producer and consumer surplus characterizing the autarky equilibrium in your graph.
e) Now calculate consumer surplus, producer surplus, and total welfare.
f) Now you want to establish whether free trade would be beneficial for Sweden. The analysts tell you that the current world market price for autos is 25 Euros (unrealistic, but for the sake of simplicity) and you know that Sweden is a "small country" in automobile industry. At the world market price, what would be the quantity produced and consumed domestically in Sweden? What quantity will be imported?
g) Draw the new consumer and producer surplus in your graph resulting from free trade.
h) Calculate the new producer surplus, consumer surplus and total welfare.
i) What is your assessment of the situation? 1) Who gains from trade, 2) who loses from trade, and 3) do you think free trade of cars would be beneficial for Sweden?
j) Imagine for a moment that Sweden is a large player in the automobile industry. Would Sweden's participation in the global trade in autos drive world prices up or down? Why (briefly)? What would the world market price be after Sweden opens its borders (as close as you can tell)?