Question

refer to figure 34-1. the u.s. demand and supply for a good are shown. under a policy of free trade, the world price is \\(p_w\\). if there is a policy change such that imports are prohibited, the price becomes \\(p_n\\). u.s. producers are better off if imports are \\(\underline{\quad\quad\quad\quad}\\); specifically, their producers surplus changes by area \\(\underline{\quad\quad\quad\quad}\\).

prohibited; \\(p_n bdp_w\\)
permitted; \\(p_n bdp_w\\)
prohibited; \\(bdc\\)
permitted; \\(p_w de\\)

Explanation:

Analyze the initial free trade scenario

Using the Free Trade Welfare Analysis knowledge point
Under free trade, the domestic price is equal to the world price \(P_W\). At this price, domestic producers supply quantity \(Q_1\) (point \(D\)). The producer surplus under free trade is the area above the supply curve \(S_{US}\) and below the price line \(P_W\), which is represented by the triangle \(P_W DE\).

Analyze the autarky scenario

Using the Free Trade Welfare Analysis knowledge point
When imports are prohibited, the market must clear domestically. The equilibrium price rises to the autarky price \(P_N\), where domestic demand \(D_{US}\) equals domestic supply \(S_{US}\) at point \(B\), with quantity \(Q_2\).

Determine producer surplus change

Using the Producer Surplus knowledge point
At the higher price \(P_N\), domestic producer surplus becomes the area above the supply curve and below the price line \(P_N\), which is represented by the triangle \(P_N BE\). The change in producer surplus is:

$$ \Delta PS = \text{Area}(P_N BE) - \text{Area}(P_W DE) = \text{Area}(P_N BDP_W) $$

Since this change is positive, domestic producers are better off if imports are prohibited.

Match with the options

Using the Producer Surplus knowledge point
The statement asks: "U.S. producers are better off if imports are \_\_\_\_\_\_\_\_; specifically, their producers' surplus changes by area \_\_\_\_\_\_\_\_."

• The first blank is "prohibited".
• The second blank is the area representing the increase in producer surplus, which is \(P_N BDP_W\).

This matches the first option.

Answer:

• prohibited; \(P_N BDP_W\) (Correct answer)
• permitted; \(P_N BDP_W\)
• prohibited; BDC
• permitted; \(P_W DE\)