Problems & Applications (Ch 09)
5. Problems and Applications Q5
The nation of Textilia does not allow imports of clothing. In its equilibrium without trade, a T-shirt costs $24, and the equilibrium quantity is 4 million
T-shirts. After reading Adam Smith's The Wealth of Nations while on vacation, the president decides to open the Textilian market to international
trade. The market price of a T-shirt falls to the world price of $16. The number of T-shirts consumed in Textilia rises to 8 million, while the number of
T-shirts produced declines to 2 million.
Use the blue line (circle symbol) to graph the domestic demand for T-shirts in Textilia. Then use the orange line (square symbol) to graph the
domestic supply of T-shirts in Textilla. Next, use the black point (plus symbol) to indicate the domestic equilibrium price and quantity before trade.
Finally, use the grey line (star symbol) to indicate the world price.
Note: Assume the domestic demand and domestic supply curves are linear.