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. consumers are worse off if imports are ______; specifically, their consumers surplus changes by area ______.

permitted; \\(p_wde\\)
permitted; \\(p_n bdp_w\\)
prohibited; \\(p_wabd\\)
prohibited; \\(p_nbcp_w\\)

Explanation:

Analyze the initial free trade state

Under free trade, the domestic price is equal to the world price, \(P_W\). At this price, U.S. consumers purchase quantity \(Q_3\) along the demand curve \(D_{US}\) (point \(C\)). The consumer surplus under free trade is represented by the large triangular area below the demand curve and above the price line \(P_W\), which is the area \(A C P_W\).

Analyze the import prohibition state

When imports are prohibited, the market must clear domestically. The price rises to the autarky equilibrium price, \(P_N\), where domestic supply \(S_{US}\) intersects domestic demand \(D_{US}\) (point \(B\)). At this higher price, the quantity demanded by U.S. consumers decreases to \(Q_2\). The consumer surplus under import prohibition is the area below the demand curve and above the new price line \(P_N\), which is the area \(A B P_N\).

Determine the change in consumer surplus

Comparing the two states, U.S. consumers are worse off when imports are prohibited because the price they pay rises from \(P_W\) to \(P_N\). Specifically, their consumer surplus decreases by the area between the two price levels and to the left of the demand curve, which is the trapezoidal area \(P_N B C P_W\).

Match with the given options

The prompt asks: "U.S. consumers are worse off if imports are ______ ; specifically, their consumers' surplus changes by area ______."

• The policy change that makes them worse off is when imports are prohibited (moving from free trade to no imports).
• The corresponding change (reduction) in consumer surplus is the area \(P_N B C P_W\).

This matches the fourth option: "prohibited; \(P_N B C P_W\)".

Answer:

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