Complete Question
The complete question is shown on the first uploaded image
Answer:
The correct answer is C producer surplus decreases and total surplus increases in the market for that good
Explanation:
The figure on the second uploaded image represents an importing country:
On the image what these letter denote are stated below
(D) is the domestic demand curver. (S) is the domestic supply curve. (W) represents the world price, which is a flat line because we assume that one nation does not have market power over the world market. Notice that the world price is set below the intersection between domestic demand and domestic supply. This is because the world price must be lower than the domestic equilibrium price in order for it to make sense for a country to import.
If the country has free trade, then the equilibrium will be determined by the intersection of W and D. If the country enforces no trade, then the equilibrium will be determined by the intersection of supply and demand. Notice that no-trade will result in higher prices and lower quantities than free trade.
We can evaluate welfare in terms of the shaded areas.
If there is free trade:
Consumer surplus = orange+purple+grey
Producer surplus = maroon.
Total surplus = orange+purple+grey+maroon
If we have no-trade:
Consumer surplus = orange
Producer surplus = purple+maroon
Total surplus = orange+purple+maroon
That is, the purple area is a transfer from consumers to producers when we move from free trade to no trade. The grey area is deadweight loss, as it disappears if we move from free trade to no trade.
Now, let's look at each of our answer choices to see which is consistent with this analysis.
(A) says, "producer surplus increases and total surplus increases in the market for that good."
This is false. Producer surplus does increase. However, total surplus decreases because the grey area disappears in a world with no trade.
(B) says, "producer surplus increases and total surplus decreases in the market for that good."
This is true. It is the correct answer.
(C) says, "producer surplus decreases and total surplus increases in the market for that good."
This is false. Producer surplus increases because the purple area is transferred from consumers to producers when we move from free trade to no trade. Also, total surplus decreases because the grey area disappears in a world with no free trade.
(D) says, "producer surplus decreases and total surplus decreases in the market for that good."
This is false. Producer surplus increases because the purple area is transferred from consumers to producers when we move from free trade to no trade.
