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\\). at this price, producers surplus equals the area

\\(p_w c b p_n\\).
\\(dbc\\).
\\(p_n b d p_w\\).
\\(p_w de\\).

Explanation:

Identify the market price

Under a policy of free trade, the domestic price is equal to the world price, which is given as \(P_W\).

Define producer surplus

Using the Producer Surplus knowledge point

$$ \text{Producer Surplus} = \text{Area below } P_W \text{ and above } S_{\text{US}} $$

Determine the area on the graph

The supply curve \(S_{\text{US}}\) starts at point \(E\) on the vertical axis. At the world price \(P_W\), the quantity supplied by domestic producers is \(Q_1\) at point \(D\). The area bounded by the price level \(P_W\), the supply curve, and the vertical axis is the triangle \(P_WDE\).

Answer:

• (A) \(P_W C B P_N\)
• (B) \(DBC\)
• (C) \(P_N B D P_W\)
• (D) \(P_W DE\) (Correct answer)